Ian Cowie: decade in the doldrums predicted for US stock market

Goldman Sachs predicts a “lost decade” for American shares, with nominal returns of 3% per annum, or just 1% after allowing for inflation, prompting fears the biggest stock market in the world might be priced for perfection and due a correction.

To be fair, even the investment bank’s chief US equity strategist David Kostin has no crystal ball or certainty about the future. He also predicts the S&P 500 index will hit 6,000 next year (it is currently just above 5,800 at time of writing) before beginning its decade in the doldrums.

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Here and now, the fact remains that each investor’s entry point - or the price we pay to buy an investment - will have a big impact on whether we enjoy profits or suffer losses.

As someone who has owned shares in the tractor-maker Deere & Co (NYSE:DE) and the burger-flipper McDonald's Corp (NYSE:MCD)’s for more than a decade - plus the iPhone-maker Apple Inc (NASDAQ:AAPL) for more than eight years - I have no intention of selling. They are my three most valuable holdings and all American.

But Goldman’s marmalade-dropper serves as a reminder about the importance of international diversification. So it is worth considering investment trusts focused on Continental Europe, which is the biggest free trade zone in the world outside America and China.

Better still, Fidelity European Trust Ord (LSE:FEV), a £1.9 billion investment trust in which I own shares, is the top performer in the Association of Investment Companies (AIC) “Europe” sector over the past decade with a total return of 215% but it remains priced -9% below its net asset value (NAV). That’s despite yielding dividend income of 2.3%, which has risen by an annual average of 5.6% over the past five years, according to independent statisticians Morningstar.

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The explanation is that FEV’s relative performance has fallen off lately, with total returns of 66% over five years and 18% over the last year. Part of the problem is high exposure to luxury goods businesses, where sales have been flattened by the Great Fall of China, with a property crisis crushing consumer confidence.

So FEV’s top 10 holdings in the Champagne to Cognac giant Lvmh Moet Hennessy Louis Vuitton SE (EURONEXT:MC), and the cosmetics company L'Oreal SA (EURONEXT:OR) have not helped recently. Fresh evidence about how this trend is developing can be seen in third-quarter earnings reports from the Gucci-owner Kering SA (EURONEXT:KER) yesterday; the scarves and bag-maker Hermes International SA (EURONEXT:RMS) today; and the “athleisure” giant adidas AG (XETRA:ADS) tomorrow.

However, I intend to hold on to FEV because its other top 10 holdings include the weight-loss wonder-drug maker Novo Nordisk AS ADR (NYSE:NVO); the biggest food and drinks business in the world Nestle SA (SIX:NESN); and the Oakley to Ray-Ban eyewear group Essilorluxottica (EURONEXT:EL).

I also hold shares in all three of these European giants directly but don’t mind topping up via this investment trust, plus exposure to the business that makes the machines that make microchips ASML Holding NV (EURONEXT:ASML).

Followers of form may prefer Henderson European Trust Ord (LSE:HET), which is the top performer over the last year with a total return of 21%, after delivering 61% over five years and 160% over the decade. Like FEV, HET’s top two holdings are NOVO and ASML, but luxury goods groups are absent from its top 10. Instead, there is the software company SAP SE (XETRA:SAP); the oil and gas group TotalEnergies SE (EURONEXT:TTE); and the Becks to Stella Artois brewer Anheuser-Busch InBev SA/NV (EURONEXT:ABI).

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HET’s dividend yield of 2.5% is fizzing up by an annual average of 7% over the past five years. It is important to beware that dividends are not guaranteed and can be cut or cancelled without notice. However, if HET could sustain that rate of increase, it would double shareholders’ income in just over a decade. Despite all that, the shares continue to trade at a discount of -12% to its NAV.

JPMorgan European Growth & Income Ord (LSE:JEGI) is the leader over five years with a total return of 74%, following 162% over the decade and 18% in the last year. Once again, the top two holdings are NOVO and ASML with NESN, SAP and TTE also featuring.

Pharmaceutical giants Novartis AG Registered Shares (SIX:NOVN) and Roche Holding AG (SIX:ROG) give JEGI more exposure to healthcare than its rivals and the highest dividend yield in its sector, 4.3%, rising by a remarkable 13.9% annualised over the past five years. Bearing in mind the warnings about past performance mentioned earlier, it is still worth considering that if that rate of increase is maintained, JEGI would double shareholders’ income in just over five years. Even so, it is still trading at a -13% discount to NAV.

Many British investors are a bit silly about the rest of Europe, imagining it is full of bureaucrats and corporate losers, regardless of the world leaders in their sectors named above. Whether we are Brexiteers or Remainers, it is worth considering some exposure to the Continent - and not having all our eggs in a basket of American equities.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Adidas (ADS), Apple (AAPL), Deere (DE), EssilorLuxottica (EL), Fidelity European (FEV), McDonald’s (MCD), Nestlé (NESN) and Novo-Nordisk (NOVO) as part of a globally diversified portfolio of investment trusts and other shares.