The bad news (for our Euro Fund at least) is that Sterling continued to strengthen against the Euro during the second quarter (1/5/21 to 31/7/21). We created this fictional Fund as a hedge against a falling sterling and a year ago the rate was €1.11 and heading towards parity, but today it is at €1.17 thanks largely to the far more efficient rollout of the Covid-19 vaccine in the UK, compared to the rest of the Eurozone.
Despite Sterling strengthening against the Euro by more than 5% in our first year, the Fund still returned 30.5% (in Sterling) but in Euros it is up 37.6%, including dividends. This despite the fact that two of the original shares fell below the 20% stop-loss in our first quarter, (making a 20% loss), which was to be expected at the time as most investors diving into the European stock market last summer were attempting to catch some falling knives. However, when the returns over the past nine months from the two replacement stocks – Cofinimmo in Belgium and Wereldhave in the Netherlands – are combined, they have already recovered those early losses.
While this is not a high yielding Fund, the total income in the first year through dividends was 4%, which in today’s environment is pretty decent. That average could rise later this year however, as Wereldhave recently announced that it will pay a minimum dividend of €1 per share later this year, which is the equivalent to a 12.6% dividend yield on the €7.96 share price that we bought the company at just nine months ago (see table).
The European economy is reviving faster than expected
According to Frédérique Carrier, head of investment strategy at RBC Wealth Management, European equities are Overweight, which means he thinks they will perform better in the future than the market currently prices them at. Carrier says the European economy is recovering so quickly that it has sparked a debate about when the European Central Bank should take its foot off the gas and stop printing money. However, Carrier thinks that monetary policy in the Eurozone will stay loose for some time.
He adds: “Europe, where many countries had to extend lockdown measures, is finally emerging from a long economic winter thanks to lower infection rates and an accelerating vaccine rollout. While the region previously had been a laggard in overall vaccination rates among developed nations, it is now recording some of the highest numbers of new inoculations per capita.”
Carrier says the PMI (Purchasing Managers’ Index) in the Eurozone is at a three-year high, adding: “With France, Italy, and Spain having eased social distancing restrictions, activity in the euro area services sector may well recover even further.”
