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Brian Tora: Business as usual despite the Euro election upsets

Much ado about nothing in the Euro elections 

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In the wake of the European election results, which I acknowledge are ancient history now, I was asked to comment on the radio on how equity markets had reacted to events. The day immediately following the publication of the winners and losers saw the London Stock Exchange closed for a bank holiday. European bourses were open, though, and they seemed to shrug off  the apparent disillusionment shown by voters. No surprise, then, that we did the same on the Tuesday – hardly a riveting piece 

of news to broadcast.

Does this mean these elections were a non-event? Probably, given that the actual balance of power in Brussels and Strasbourg appears to have changed little.

The only countries where there did appear a seismic shift were the UK and France – and even here it is more to do with what the advance of the Eurosceptics might mean for a general election.

The summit held immediately after the results also suggested little was likely to change. That the major parties here and across the Channel were shaken by what transpired was clear but their individual reactions told different tales. Given that elsewhere the status quo seems pretty much in place, President Hollande’s less strident comments seem understandable. The impor-tant issue is what all this might mean for markets in the months ahead.

Last week, the S&P 500 Index reached a new high – one of several struck this year. Our own market made a further feeble attempt to break the peak of more than 14 years ago. Perhaps it has succeeded by now but it was at least in good company, with both French and German leading indices still below previous peaks – on a price basis, that is. As with our own market, use a total return calculation and these indices look altogether more appealing. This, of course, remains a powerful argument in favour of equity investment. Dividends generally rise on average, even if there have been some unfortunate reversals of this trend recently, and the compounding effect on investment returns is impressive. This point was reinforced by Annabel Brodie-Smith of the Asso-ciation of Investment Companies.

Apparently a quarter of the conventional investment trusts that are members of the AIC have succeeded in raising their dividends in each of the last 10 years. Some can even point to a 40-year rising dividend track record. Of course, investment trust rules do allow for a smoothing of dividend payments, allowing income to be kept in res-erve during good years to enhance payouts when the going is tougher but it is still an impressive record.

Perhaps we should be paying more attention to income in these days when so much uncertainty exists, yet shares, by and large, are not doing too badly. At least a decent dividend stream means that investors are being paid for owning shares. This, after all, was the approach adopted by Benjamin Graham, reckoned to be the father of value investing and a beacon for many, including Warren Buffett.

Such an approach might give some protection if some of those uncertainties turn out to be more unsettling than they appear from a distance. Ukraine seems to have settled down a little but it has not gone away. The Scottish independence vote is looking a far closer call than any might have thought a year or so ago. And could Ukip really cause a further upset in next year’s general election?

Only time will tell, of course. Meanwhile, perhaps by now we will know if the European Central Bank is to ease further in an effort to rekindle economic growth. Brussels bureaucrats must be praying for a return to prosperity. They surmise that the anti-European vote will evaporate once people start to feel better off. Markets in Europe should give us a steer.

Brian Tora is an Associate with Investment Managers, JM Finn & Co.

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