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Fidelity European Values Trust Plc – 15 January 2015

Company Overview:

Fidelity European Values Plc (FEV) is an investment trust listed in London. The trust’s objective is to achieve capital growth by investing in the equity markets of continental Europe. The trust’s mandate requires that the investment manager concentrates 80% of assets in companies that are listed on exchanges included in the benchmark FTSE World Ex UK Index.

The investment manager can invest up to 5% of the portfolio in non-European listed entities which have a significant exposure to the continent. Up to a further 5% of the portfolio may also be invested in unquoted companies.

The investment mandate also encourages the use of leverage within the portfolio, out of the belief that long term investment returns resulting from this will outweigh the costs of any borrowing. Gross gearing is capped at a maximum of 30% of assets.

Benchmark FTSE World (Ex UK) Ticker FEV.L Latest Close 159.40
52 Week High 165.00 52 Week Low 137.40 Exchange LSE
Dividend Yield % 1.96 Dividend (Pence) 29.75 Discount to NAV % 7.8
NAV 172.97 Price Target 166.00

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Fidelity European Values Plc outperforms continental indices in 2014

Careful asset allocation across sectors has benefited the Fidelity European Values throughout the last year, with the trust’s performance aided by a relatively minimal exposure to oil & gas, as well as the basic materials sector. It has also found support through having a low exposure to the European utilities sector.

Moreover, NAV has been supported throughout recent times by a 15% portfolio allocation to the Healthcare sector, which has outperformed the market several times over during the last 18 months.

FEV also holds large positions in financials as well as in consumer goods focused companies, both of which have underpinned the portfolio throughout a year where European markets as a whole, have fallen.

In terms of the shares, FEV.L has averaged the price at which we initiated coverage since May this year, gaining 5% in total from the point at which we initiated coverage. The positive performance from the trust has also led the discount to NAV to narrow from just above 10% at the time we last covered it, to 7.8% today.

While the trust’s performance compares well to the average of core European indices (0.7%), below we explain why we are reducing our expectations for returns over the coming year.

FEV.L / Daily Intervals

FEV.L JANURARY

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European economies & European equities in 2015

The year of 2014 was characterised by a reawakening sense among investors that another crisis could be building.

Despite the economic under-performance and geopolitical risks which have emerged, increasing expectations that the ECB will eventually embark upon its own program of outright quantitative easing have underpinned continental equity markets.

In terms of growth, Europe suffered multiple setbacks at both the core as well as on the periphery during 2014. This was reflected in persistent downgrades to both French and German GDP forecasts while the Italian economy also deteriorated further on the periphery.  

On a more positive note, Spain was one of the strongest performers among Europe’s larger economies in 2014, although formerly one of the troubled periphery “bailout club” nations. The southern European nation is also forecast to remain among the strongest performers during 2015. (Goldman Sachs @1.6%, Commerzbank @ 2.3%).

Looking to the immediate future and the month ahead, all eyes are fixed firmly upon the January flash inflation estimate and the ECB meeting toward the close of the month.

Since the turn of the year, the probability that the ECB moves to combat dis inflationary and deflationary pressures this in Jan, instead of later, has increased. This is mostly due to last week’s December CPI figures, which showed inflation falling below zero and into deflation territory for the first time.

Since then, market expectations for an all out asset program from the ECB have continued to build, with many analysts now anticipating a move to purchase both corporate and sovereign bonds at the end of the month.

It is interesting to note that Bloomberg news reported late last week, that the ECB had been modelling various bond purchases programs, some of which include the debt of peripheral nations such as Greece and Italy, while other models built by the bank are thought to have excluded such bonds.

This report increases the risk of market disappointment later this month, in our view. With German and  French yields already close to record lows there is a widespread sense of valid scepticism over exactly what a bond purchase program could actually do for these economies.

Therefore, if the ECB were to announce a program which excludes peripheral nations, who have a greater need for assistance, then the whole idea could be met with scepticism from the market.

This would add fuel to the fire of far left and far right parties as well as making it likely that individual investors will be left disappointed in the wake of the ECB announcement. However, we also note these are unconfirmed reports and that broad based ECB bond purchases remain a possibility.

Regardless of the composition of the eventual ECB bond purchase program we expect there to be at least a moderately positive impact upon equity markets over the near term, which is a positive for Fidelity European Values Plc.

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The year ahead in Europe – Stockatonia 2015 Outlook

In terms of the full year outlook for the continent, we are reducing our expectations for European equities as a whole and are in the process of updating our analysis and price targets for relevant companies in order to reflect this.

Whereas before we had hoped for a moderate economic recovery to generate a return to earnings growth for European corporates, we now believe that this is less likely to happen. To be more specific, we anticipate that benchmark returns in most parts of the continent will be uninspiring at best.

This is because we see earnings growth in Europe remaining fractured with some companies benefiting from a cheaper euro and lower oil prices, while other more domestic focused companies are likely to continue to struggle. This appears to be particularly likely in France, Germany and Italy.

In addition to the above, we are concerned about the impact that political risk may have on investor sentiment and financial markets, most notably in relation to Greece, France, Italy and Spain. We also note that the UK is a further bastion of muddy water in this regard.

Such concerns are not new to the UK and European investor’s horizon, as a slow but sure shift to far right and far left politics has been under-way for some time in the above referenced places.

However, with national elections now due to be held in three of the most eurosceptic countries, 2015 appears to be the year that will bring forth a day of reckoning for the both the currency union as well as the political union.

The obvious concern among investors is that if just one eurosceptic party is able to gain power and begin a push to exit the union, a blueprint will have been set for others to follow suit at a later date. This  would then lead to a prolonged period of even greater uncertainty for the continent.

This holds negative connotations for equity markets as, with elections at the January, May and December points of 2015; bouts of uncertainty are likely to be a frequent occurrence during the coming year.

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The takeaway

Looking ahead, and on the contrary to much of the above, we see potential for growth to weather the storm in the euro area during the year ahead. This is given the low base of GDP, at 0.8%, as well as the additional boost that many nations will receive from a lower euro and lower oil prices.

However, on balance, we are less optimistic in relation to European equities. This is mostly as a result of risks to investor sentiment and the likelihood of uninspiring earnings growth across broad swathes of continental indices.

Therefore, we are reducing our expectations for shares in Fidelity European Values Plc throughout 2015. We now anticipate moderate returns at best for the Trust, although we are maintaining our existing price target of 172.00 pence per share for the time being.

This represents a further uplift of 7.8% in the NAV value of FEV.L, at a constant discount rate, which we feel is reasonable in light of the impending ECB decision and its exposure to markets which are likely to respond positively to this. (Germany, France, Belgium, Finland, Norway & Denmark).  

 

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