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EP Global Opportunities underperforms volatile markets

EP Global Opportunities Trust, managed by Dr . Sandy Nairn (pictured), has announced its interim results for the six months ended 30 June 2016. During the period, which the trust’s chairman, Teddy Tulloch, describes as being a volatile one for global equity markets, the trust’s NAV per share increased by 5.6%, whilst its share price increased by 4.1% reflecting a widening of the discount from 2.2% to 3.6%. Including the dividend of 3.1p per share, the NAV total return, during the period, was 7.0%. This compares against total returns of 12.0% and 4.3% for the FTSE All-World Index and FTSE All-Share Index over the same period.

In terms of the Company’s investment portfolio, the trust’s chairman says that the volatility, seen at the beginning and end of the period, adversely affected the financial sector, with the share prices of European and Japanese banks seeing significant falls. He says that while the move by their respective central banks to negative interest rates will affect short-term profitability, the most severe impact, in his view, was on investor sentiment. In contrast, he says that other banking stocks in geographic areas where this policy has not been implemented performed well, such as Bank Mandiri in Indonesia and Bangkok Bank in Thailand.

BG was taken over by Royal Dutch Shell during the period and the trust retained the majority of its combined holding and, at 4.4 per cent of net assets, is now its largest investment. The chairman says that the trust’s oil and gas sector holdings, including Apache and BP, performed well during the period.

In the health care sector, the chairman says that stocks suffered collateral damage from some of the revelations relating to drug pricing in the US but they believe that stocks such as Novartis, AstraZeneca and Roche remain attractively priced, supported by strong balance sheets and dividend yields, and these holdings were added to during the period.

The chairman says that, for sterling-based investors, the overall returns achieved from global equity markets during the period were positively affected by currency movements, principally as a consequence of the weakness in sterling that occurred in June following the UK referendum vote. During the period, sterling weakened by 9% against the US dollar, 11% against the Euro and 23% against the Japanese yen. He says that, as a result, in a number of equity markets, primarily in Europe and Japan, negative returns in local equity markets turned into positive returns when converted into sterling. The trust’s chairman says that the investment manager considered that the move in the Japanese yen, relative to sterling, was excessive and that, just before the period end the trust entered into a foreign currency forward contract to hedge the equivalent of £27m of the Japanese yen exposure back to sterling. Furthermore, the trust hedged an additional £4.5m of exposure in August. The chairman says that this effectively hedged 95% of the Japanese yen value of the trust’s Japanese shares.

In terms of outlook, the trust’s chairman says that the moderate growth in many of the world’s major economies, combined with minimal rates of inflation, has resulted in interest rates being held at historically low levels for a number of years. He comments that, in Continental Europe and Japan, central banks are continuing to buy back aggressively their government bonds and that, whilst the US Federal Reserve had indicated that they would start to raise short-term interest rates, this has now been put on hold and there is unlikely to be an increase before the presidential election in November 2016. In the UK, the Bank of England reduced the bank base rate to a historic low of 0.25 per cent in August and announced a programme to buy £60 billion of UK government bonds. Reflecting this, the chairman says that equities generally look much better value than bonds, but many share valuations are becoming increasingly expensive in absolute terms relative to historical levels. He says that this is particularly true in the US where the S&P Composite Index has recently moved to a new all-time high, despite the lack of growth in corporate earnings, and that, as a consequence, the trust now has less invested in US equities than might be expected for a global investment trust.

The chairman says that, whilst they have reduced their exposure to the Japanese market during the last year, they continue to remain positive about the potential for a valuation improvement in the share prices of the Japanese stocks they hold within the portfolio. He says that the health of the Chinese economy remains a key issue for equity investors, given its very significant contribution to global economic growth. However, they consider that a number of the concerns have been overstated and there is the potential for an improvement in corporate profitability which could have a positive impact on stocks in the Asia Pacific region.

The chairman says that, whilst they have concerns over valuation levels in some equity markets, these are tempered by the continued policy of monetary stimulus that is being applied around the globe as governments attempt to stimulate economic growth and resist deflationary forces. He says that such a policy seems likely to continue for some time and that they will continue to avoid those areas where valuations look excessive.

EP Global Opportunities underperforms volatile markets : EPG

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