This week I am focusing on the European stock market, which has suffered bouts of volatility in recent months.
Like its global peers, Europe has fallen prey to a range of macroeconomic events including the slowdown in China, the timing of an interest rate rise in the US, and the prospect of a referendum on the UK’s continued membership of the EU. Within the bloc itself Greece has dominated the media, raising concerns that Spain may elect an anti-austerity party in December. Consequently, the FTSE Eurofirst 300 index – comprising the region’s 300 largest companies by market capitalisation – has fallen by 18% from peak to trough year-to-date.
Even Germany – widely viewed as Europe’s industrial powerhouse – has not escaped, with the DAX index declining by 24% between April and September. Carmakers have been key drivers, which is unsurprising not least because of the VW emissions scandal, but also because Germany exports the greatest number of vehicles to China of all 28 EU member nations.
There are, however, reasons to be positive. ECB president Mario Draghi stunned markets this week by announcing his willingness to cut interest rates and expand quantitative easing (QE) to prevent another economic slump. The weak currency has boosted demand for goods and services, reflected in stronger corporate earnings growth.
In this uncertain environment, it is important to look through the immediate noise and focus on the longer-term picture. Investment trusts are ideally placed to take such a long-term view, as their closed-ended structure removes the need for their managers to be mindful of redemption requests from short-term investors.