It is not all doom and gloom in Europe - here's where I am investing

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It's been a good few weeks for the euro-jeerers. The two easiest soft targets from the sidelines were probably Jean-Claude Juncker, the thirsty president of the European Commission, and work-shy Arab refugees housed in Waldenburg, a castle-topped hill town in south-central Germany.

Juncker, no newcomer to peculiar pronouncements, particularly after lunch, declared that 'borders are the worst invention ever': meanwhile, irritated Middle Eastern refugees declined to do voluntary work for their German hosts because they were 'guests of Angela Merkel, and guests don't work'.

Cue derisory jeers - but not in the corner of Tim Stevenson, manager of Henderson Eurotrust. Now, Stevenson is as well aware as any that eurocrats are easy to ridicule and that imperfections and absurdities abound in the European Union.

EUROPE WILL EMERGE FROM BREXIT STRONGER

But when it comes to Brexit, he avers the UK will emerge from the exercise in worse shape than Europe. 'It will be unsettling for both sides,' he says. 'People I talk to in Europe are mystified as to how we came to such a decision. But Europe will get on fine.'

He adds: 'We can all find 25 reasons why Europe doesn't work properly, and the usual moans have been around for a long time. But the UK jumped ship instead of staying on board and working to resolve the issues.'

Regardless of this, 'what we will see in Europe is a slow and gradual economic improvement, and European companies will continue to become stronger'.

He says they are well-run, something he feels gets overlooked in all the 'anti-European rhetoric'. 'There are some fantastic European companies.'

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Stevenson, a German-speaker and an old hand at investment sur le continent, believes 'Europe [orchestrated by the European Central Bank] is running its economies properly, instead of running away from the [debt] problem as we are in the UK'.

'The Bank of England has just cut interest rates again,' he adds, and this will do nothing to ease the nation's debt overload.

'Europe is trying its best to keep debts sustainable. We have now devalued sterling and that won't help European exporters to the UK; but they will suffer only a bit.

'As an investor, I'm not concerned about the quality of the companies I own; the UK is just one of many export markets that most of them trade with.'

For the UK, however, he predicts a 'negative impact' as a result of Brexit. Five years hence, it will really bite. The Bank of England recognises this, he thinks, or it wouldn't have cut interest rates.

POLITICAL TENSIONS

The increase in European political tensions post-Brexit don't concern him. 'There are political tensions worldwide: just look at Trump/Clinton.'

These tensions were heightened in September, when German chancellor Angela Merkel's Christian Democratic Union party won less than 20 per cent of the vote in a state election in Mecklenburg-Western Pomerania, her home state - bested by support for the far-right anti-migrant Alternative for Germany party.

Both France and Germany have national elections next year, and Stevenson points out there will also be a 'big protest vote' - anti-EU, anti-migrant - in France, where President Hollande 'has not a chance of being re-elected'. This is a view few would dispute.

There will also be a referendum in Italy - a basket case in the opinion of many and the weakest link in the chain of early callers to the EU table - on electoral reform. The hope is agreement for a new voting system, one that would bring about a more stable system of government.

'It has been a national pastime in this country [the UK], speculating on when the euro and the European Union will collapse. You can make these points very strongly. I'm of the opinion they won't collapse. The EU is a political project and it will be forced to work,' Stevenson insists.

'People rarely discuss the [renewed] strength of the economy in Ireland. That has come about because the EU forced the country to face up to its debts and run its economy properly.'

He adds: 'The issue for me, and the lesson from the past, is to just concentrate on what the companies do. I've learnt that a hell of a problem is also a hell of an opportunity.'

The problematic issue of refugees pouring into Europe is such an opportunity. 'From a purely humanitarian point of view, what the German government has done is quite noble.

'But many of the migrants Germany is getting are more affluent and educated than many of their countrymen who stayed behind. Suddenly, Germany is getting an influx of educated people with skills.'

COMPETITIVE EXPORTERS

Meanwhile, the exporters in Stevenson's portfolio have benefited from weakness of the euro against the dollar, and 'the competitive position has improved considerably. We'll not get the same benefits this year, of course, as that tailwind is now out of the system'.

UK investors have recently gained from sterling's weakness against the euro and this has helped propel Henderson Eurotrust, a £190 million entity, to an 8 per cent gain over the past six months.

This equates to top-quartile performance. Over five years, the price has more than doubled, but with the trust trading on a 9 per cent discount to net asset value at the start of September, this gain has been outpaced by the increase in net asset value.

Stevenson, who has been at Henderson for 30 years, has managed his trust since 1992. With an eye to the past and another to the future, he reckons the 15.4 average price/earnings ratio in European markets is 'not excessively high'.

'The ratio in my fund is 17.5 times earnings, but I've got a lot more growth in my portfolio than the market.'

Analysts are forecasting average earnings growth of 10.4 per cent for companies in his fund this year, he says, and 3.5 per cent for the FTSE World Europe (ex UK) index. 'We know they will be wrong.'

Roughly one-third of Stevenson's fund is invested in French companies, and around one-quarter in German.

'I have no geographical bias. And I'm not a top-down investor. I'll invest anywhere in Europe; in a period of slow growth, it's all about what individual companies can do against that background.'

Stevenson's 10 largest investments represent almost 30 per cent of the fund, and two of the top 10 are related companies: Fresenius Medicalcare, a diversified healthcare company with global influence; and Fresenius SE & Co., which is 31 per cent owned by its parent.

The varied interests of the parent company, which has more than 200,000 employees scattered around the globe, include running hospitals.

The partly owned subsidiary focuses on medical supplies for renal dialysis. 'Kidney failure represents a growth market, especially in the Middle East and the Far East. The rise is caused by diabetes brought on by obesity,' he says.

'It might seem macabre to invest in something that gains from the misfortune of others, but you can also see it as investing in a company that is doing something to help these people.'

Stevenson's trust owns about 55 companies. He is not slow to take profits on an investment that he feels is temporarily overpriced, and buy it back at lower levels. On average, he buys between 10 and 15 new firms a year, and sells about the same number.

Right now he is especially keen on Deutsche Post, the privatised German equivalent of Royal Mail. The firm, he points out, owns DHL, the parcel company, 'the biggest logistics company in the world'.

'It offers a reasonable income and is a well-run company. Here, the privileged Royal Mail does a bit of parcel delivery and you'll receive a few letters if you're lucky.'


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