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David Kempton: cheap investment trusts among the uncertainty
With Europe in the doldrums, David Kempton turns his attention to some heavily discounted investment trusts with assets outside the troubled region.
Concerns about Europe are a real cloud hanging over world markets, and massively exceed the other current perceived risks at the moment.
China continues to gently back-pedal, but the economy is still only less than half of the size of the US, so there remain 20 years of catch-up, notwithstanding the ageing population. Usefully, though, a move towards pension-planning awareness is increasing local buying of equities.
Middle Eastern threats remain, but even Israel’s aggression towards Iran has seemingly moderated, at least until after the November US election.
Europe weighs on the wider world
Meanwhile, back in Europe, we influence the world with our deliberations. Last week I visited three European countries and saw real anger among young Spanish workers, 50% of whom are unemployed; continued jollity in Italy where cash prevails and credit cards are unwelcome, leading to constant visits to busy ATMs; and Ireland, the erstwhile Celtic tiger, showed an admirable resignation to its realities.
The French election on 6 May hangs over us and could be really entertaining, if it hadn’t such serious consequences. The rhetoric is wonderful, with socialist presidential challenger Francois Hollande being referred to as ‘unfit to captain a pedalo’ by one critic. He, meanwhile, refers to Sarkozy as ‘a dodgy bloke’, but the aftermath from Sunday could be dire.
Hollande has shown open hostility towards Germany, and calls for common euro-area government bonds. With no ministerial experience at all, a clash with German chancellor Angela Merkel would be inevitable, which would probably destroy what’s left of French financial credibility, even if it is currently the fifth richest country in the world.
Could Sarkozy really be the first incumbent president in 50 years to lose the first vote, effectively to a man whose policies would be quite disastrous for France?
While Spain imposes more austerity, causing even more pressure on its banks as house prices collapse, and Italy struggles with its astonishingly cumbersome labour laws, is it inconceivable that, following a Hollande success, Germany and its stronger neighbours might be forced to break away, as Hollande talks the weaker members and their banks into the advantages (to them) of a weak euro?
Under this scenario, Germany and its strong neighbours would be forced to break away with a stronger currency, and to make their BMWs in China, Poland and the US.
My investment trust picks
With all this terrible European insecurity I have been looking again at some of the deeply discounted investment trusts, focused primarily on a different continent.
I have mentioned the North Atlantic Smaller Companies trust before, a core holding of mine, and often consider adding to it. The investee companies are very diligently researched, but many of them are unquoted, which concerns investors. In my view, having looked at them, they are probably undervalued. The fund manager now has £35 million of his own money invested in it, and the trust has an unwarranted 27% discount.
Impax Asian Environment Markets * sits at a 14% discount. The underlying companies are Asia-Pacific based, all in the renewables and environmental sectors, with an average price-to-earnings ratio (P/E) of nine and growth of 20%, giving a price/earnings to growth figure of 0.5. This makes the trust look far too cheap and clearly a victim of the current dire investment uncertainty.
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In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.
More about this:
Look up the investment trusts
- Impax Asian Environmental Mkts (Ordinary Share)
- North Atlantic Smaller Cos (Ordinary Share)
- Hansa Trust (Ordinary Share)
- Ecofin Water & Power Opps (Ordinary Share)
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