Why it may be the best time to bet on Europe

NEXT Wednesday, Theresa May will give official notice of our intention to quit the EU by implementing Article 50 of the Lisbon Treaty.

It will start the clock on two years of tough negotiations. That means we can expect an extended period of volatility.

Although the FTSE 100 is one of the most international of all stock markets, it is still driven by the ups and downs of investor sentiment at home. It’s going to be a challenging time for investors in the UK stock market. That includes most if not all of us. British investors’ portfolios are much more heavily weighted to UK shares than you would expect on the basis of Britain’s share of global stock market values.

The total value of UK shares represents less than 6pc of the worldwide total but more than 40pc of the shares held by individual British investors are listed in London.

American shares, which count for more than half the value of global stock markets, account for only a tenth of our portfolios. This home bias is not unusual. But the Brexit negotiations mean that now might be a good time to put our eggs in a few more baskets. If you are looking to re-invest some of your UK-listed investments, where should you look? It’s an unusually interesting question at the moment because the simple answer which has served investors extremely well over the past eight years – America – no longer looks quite so obvious.

The US stock market has hit a series of all-time highs since the election of Donald Trump. At its recent peak, the S&P 500 index stood 11pc higher than it did before November’s election.

The Dow Jones Industrial Average took just 24 days to rise from 20,000 to 21,000, the fastest 1,000 point rise ever.

The recent flotation of social media company Snap, owner of Snapchat, showed just how much sentiment has improved. The company, which continues to make losses, was valued at 60 times its annual sales, the kind of multiple that investors have not seen since the hey-day of the dotcom bubble nearly 20 years ago. It rose another 40pc in just a few days after trading began.

Investors’ enthusiasm for American shares has driven their valuations higher across the board. Many worry that the US market has priced in too much good news. If President Trump fails to deliver on the tax cuts, de-regulation and infrastructure he has promised, then last week’s market wobble may be the precursor of a more substantial correction. Now looks like a good time to tread carefully on Wall Street.

Fortunately other stock markets around the world look much more interesting. Top of the list is Europe, where a combination of political uncertainty, the hangover from the eurozone debt crisis and relatively sluggish profits growth has left stock markets much cheaper than those across the pond.

The political gloom is starting to lift. Geert Wilders’ Freedom Party failed to ride a populist wave in Holland’s election.

That has lifted hopes that the mainstream parties investors prefer will retain power in the more important French and German elections later this year.

THE other stock markets that are starting to attract investors’ attention this year are in emerging markets. Many are highly dependent on commodity prices, which after four or five difficult years enjoyed a dramatic recovery last year.

Investors looking to protect their portfolios from the uncertainty facing Britain over the next two years are not short of options. But without a crystal ball, it is impossible to know which will serve them best. A well-diversified portfolio providing exposure to all the world’s main markets is the best route to a good night’s rest. Tom Stevenson is an investment director at Fidelity International.