During the last two weeks of May the Italian stock market (FTSE MIB Index) fell almost 10% and Italian Government bonds also took a material hit.
So why do we like Europe? We like Europe because, as active investors (i.e. investors who do not hug a benchmark), we have the ability to invest in companies not just economies. The fact that a company is listed in Spain, Italy or anywhere else in Europe does not mean that its future success or failure will be dictated by its home nation. For example, Italy has had 66 governments since World War II but this did not stop Ferrari from becoming the unmatched king of supercars. We Brits love to criticise French governments for being corrupt and their workers for being lazy, but we cannot touch them when it comes to global luxury brands from Louis Vuitton to Pol Roger. And who would have guessed that the Swedish would come to dominate the world’s flat-pack furniture and music streaming needs?
Our core belief as active investors is that stock markets can and will overreact to the human forces of fear and greed. It is these moments when markets have overreacted that present the most opportunities. As the saying goes, it is easier to catch big fish in muddy waters! If you believe our UK media, it seems that European politics has been on the brink of collapse for as long as I can remember. This may or may not be the case, but the uncertainty has certainly made for “muddy waters” in European markets. It may seem counterintuitive, but this has helped active investors over the period and it is notable that all but one of the large cap European investment trusts listed in London has managed to outperform the wider market over the last five years, some by a remarkable margin. Compare this to the US, where active managers have had a much more difficult time in markets that have been much less volatile and so presented fewer chances to add value through active management.
We believe that great companies progress in spite of politicians, not because of politicians. Long may this last.
Written by Fred Mahon.