Ian Cowie: never mind the politics, now’s the time to look for bargains

Sacré bleu! Stock market shock at the French president, Emmanuel Macron, calling a snap election knocked €220 billion (£187 billion) or 5% off share prices in Paris last week. Several blue-chips or big, long-established businesses, including the insurers and banks Societe Generale SA (EURONEXT:GLE), BNP Paribas (EURONEXT:BNP) and Crédit Agricole (EURONEXT:CIV), plunged by more than 10%.

Never mind the politics; what about the economics? Continental Europe remains home to several world-leading businesses and lower share prices might offer more attractive entry points for international investors seeking diversification, growth and income.

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Better still, investment trusts in the ‘Europe’ sector still trade at an average of -8.4% below their net asset value (NAV) - a deeper discount than the -6.9% average for all types of investment trust - despite delivering total returns of 149%, 51% and 14% over the past decade, five-year and one-year periods. ‘Europe: Smaller Companies’ trusts are even cheaper, trading at an average -11.4% discount after returning 150%, 46% and 12% over the same periods.

What about specific examples? Step forward Fidelity European Trust (LSE:FEV), which leads its sector of seven shares over the past decade and five-year periods with total returns of 203% and 80%, but currently languishes fifth over the past year with gains of 13%. While shareholders - including your humble correspondent - wait to find out if this is a short-term setback and an opportunity to top up or the start of a long-term problem, we are paid to be patient with 2.1% dividend income that has risen by an annual average of 5.6% over the past five years. Its current discount is -5.5%.

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What’s under the bonnet? ASML Holding NV (EURONEXT:ASML), the Dutch business that makes machines that make semiconductor chips, is FEV’s biggest holding; closely followed by Novo Nordisk A/S ADR (NYSE:NVO), the Danish company that makes the weight-loss drugs Wegovy and Ozempic; with Nestle SA (SIX:NESN), the Swiss firm that is the world’s most-valuable food and drink business in third place.

So, FEV’s top triumvirate offers professionally managed exposure to high-flying investment sectors including artificial intelligence (AI), healthcare and nutrition. This £1.9 billion investment trust’s top 10 underlying holdings also include the French luxury brands conglomerates LVMH Moet Hennessy Louis Vuitton SE (EURONEXT:MC) and Hermes International SA (EURONEXT:RMS); plus the Franco-Italian eyewear giant Essilorluxottica (EURONEXT:EL), which owns Oakley and Ray-Ban sunglasses and makes a third of all the optical lenses on this planet.

Henderson European Focus Trust (LSE:HEFT) is the sector leader over the past year with a total return of 21%, following 76% over five years and 147% over the decade. It is also notable that HEFT is trading at a -9.2% discount to NAV and its 2.3% dividend yield is rising by 7% per annum. While dividends are not guaranteed and can be cut or cancelled without notice, if that rate of ascent is sustained it would double shareholders’ income in just over a decade.

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Underlying top holdings at this £465 million trust are led by NOVO and then ASML, followed by the French oil giant TotalEnergies SE (EURONEXT:TTE). While the Champagne-to-handbags giant features again, HEFT’s biggest assets also include heavier industrials such as Schneider Electric (EURONEXT:SU), the French power controls group; and Siemens Energy (XETRA:ENR), the German civil engineer.

The European Smaller Companies Trust (LSE:ESCT) leads the four-trust sector its name describes over all three of the standard comparison periods with total returns of 213%, 91% and 19%. Even so, ESCT still trades at a -11% discount to NAV and yields 2.6% dividend income, rising by an eye-stretching annual average of 15% over the past five years.

As you might expect, none of the foreign corporate tiddlers ESCT holds could be described as household names in the United Kingdom. But this £898 million trust would have been a much better bet than European Assets (LSE:EAT) Trust, which I selected for its above-average 6.7% dividend income, albeit falling by an annual average of minus 6.6% over the past five years.

Worse still, EAT ranks rock bottom in its sector over the past decade and five-year periods, with total returns of 73% and 11%, followed by a meagre 3.8% over the past year. No wonder this trust is priced -11% below its NAV and serves as a reminder that the price of a high income today can often be low or no total returns tomorrow. Je suis choqué!

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in EssilorLuxottica (EL), European Assets Trust (EAT), Fidelity European (FEV), Nestlé (NESN) and Novo-Nordisk (NOVO).