Macron helps slash Fidelity European Values discount

Fidelity European Values half-yearly results reveal receding political risk following Emmanuel Macron’s victory in the French election has helped to almost halve the investment trust’s discount.

Its NAV returned 13.6 per cent compared to 21.4 per cent for its share price for the six-month period ended 30 June. Its current discount was 11.1 per cent at the start of the year compared to 5.5 per cent at the end of the period.

The FTSE World Europe ex UK index returned 13 per cent over the period.

However, portfolio manager Sam Morse warns politics remain unpredictable in the region.

“There are some big elections on the horizon in continental Europe, most notably in Germany this autumn and Italy early next year.

“The latter is seen as more of a risk to confidence in Europe but last year’s events have shown that a strengthening economy, which we are seeing in Europe albeit from a low base, can trump political worries in equity markets.”

Sector performance was mixed over the period with banking stocks rallying in response to an improved economy and anticipated easing in regulatory pressures. However, growing efficiency in US shale production saw energy stocks underperform.

Morse says the market is highly valued compared to historical norms and expectations for future earnings growth is also high. “The good news is that earnings are currently growing in double-digits year on year and bond yields have, to date, remained supportive to equity valuations.”

However, he notes more normalisation of monetary policy in coming months could restrain market progress with upward pressure on bond yields having a negative impact on equities.

“Many investors worry that the recent lack of volatility will prove the calm before the storm. It is, however, difficult to predict what will upset the apple cart.”

Despite Trump’s protectionism, China tightening its monetary policy and geopolitical shocks raising alarm bells, Morse says the ultimate driver of markets, in aggregate and specifically, is the real dividend growth of companies.