2022 has been grim for investors in European equities. The economic environment remains challenging, but, says Stefan Gries, Co-Manager of the BlackRock Greater Europe Investment Trust plc (LON:BRGE), there are some reasons to be more optimistic.
To discover more about the BlackRock Greater Europe Investment Trust click here
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
- Allocation to European equities is at record lows, sentiment is extremely bearish and valuations have slumped
- A number of positive factors that have been overlooked, including the low debt of corporates and consumers
- Secular trends, such as the energy transition and digitalisation are still in place
At the start of 2022, investors were looking forward to a strong continued recovery in corporate earnings, a normalisation in supply chains and an easing of inflationary pressures after the difficulties of the pandemic. However, the war in Ukraine and the resulting energy crisis, plus rising interest rates, have led to a sell-off in European financial markets amid broad-based fears of an economic slowdown.
Markets have already been characterised by a significant shift from growth to value stocks of a scale not seen since the financial crisis. This has seen some of the best businesses in Europe substantially derated. In our experience, shifts of this size can only be sustained if fundamentals back up those moves in share prices. Over any meaningful time, it is the relative strength of businesses and industries that determine share price performance.
Today, we are in a situation where allocation to European equities is at record lows, 1 sentiment is extremely bearish and valuations have slumped. This holds true for some of the best businesses Europe has to offer.
Healthy corporates and consumers
While much of the current debate focuses on when inflation is going to peak and the extent of the recession, there are, we believe, a few positive factors that have been overlooked.
When we speak to companies we hold today, many are not seeing a material slowdown in demand or order books. Their spending intentions also remain in place, often linked to transformation spend, such as digitalisation, reshoring of supply chains or the energy transition.
We believe consumers are in better health than has been suggested, with governments across Europe doing their best to protect households from those severe cost pressures, with measures ranging from capping consumer electricity and gas prices to offering credit and guarantees to power providers at risk of collapse. 2 This should provide some cushion for the squeeze in disposable income.
Energy spending
The war in Ukraine has created greater urgency among European politicians to accelerate the energy
transition and reduce dependency on imported gas. Europe had been leading the world in its environmental policies. The war may bring forward spending that might otherwise have happened
later in the decade.
As investors in Europe, we can capture secular trends, such as improving the energy efficiency of buildings, or the shift to electric transport. The European Green Deal and European recovery plan are directing sizeable investment towards climate initiatives, 3 with particular emphasis on refurbishing building stock and digitisation to make the region more competitive. This creates a cushion while global growth is slowing.
The right companies
This is an environment that will test all companies. However, the companies we own are global leaders in their industries. Many do not need a strong European economy to thrive. We invest in companies run by exceptional management teams, with a clearly defined strategy to create value. We favour companies that generate a significant amount of cash and earn good returns on the capital they invest.
This period of high inflation, supply chain disruption and multiple cost pressures has been the ultimate test for management teams. That’s why we pay so much attention to businesses that have pricing power, that have scale in procurement and a strong track record in managing supply chains. The volatility of the last few months has given us the opportunity to add to some of the portfolio’s existing, high conviction stocks.
We don’t have a crystal ball and near-term, the market remains incredibly uncertain. However, a lot of bad news is already reflected in market sentiment. For the long-term investor, volatility creates an opportunity to buy valuable assets at much lower valuations. The regime of ‘lower for longer’ interest rates may be gone, and the world is still changing around us.
This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of September 2022 and may change as subsequent conditions vary.
1 Source: Emerging Portfolio Fund Research, 31 August 2022
2 Reuters, 14 September 2022
3 European Commission, 22 September 2022
Risk Warnings
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
Trust Specific Risks
Exchange rate: The return of your investment may increase or decrease as a result of currency fluctuations.
Emerging Markets: Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore, the value of these investments may be unpredictable and subject to greater variation.
Liquidity: The Fund’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme the cases, the Fund may not be able to realise the investment at the latest market price or at a price considered fair.
Gearing: Investment strategies, such as borrowing, used by the Trust can result in even larger losses
suffered when the value of the underlying investments fall.
Important Information
Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the
Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44
(0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone
calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of
authorised activities conducted by BlackRock.
BlackRock has not considered the suitability of this investment against your individual needs and risk
tolerance. To ensure you understand whether our product is suitable, please read the fund specific
risks in the Key Investor Document (KID) which gives more information about the risk profile of the
investment. The KID and other documentation are available on the relevant product pages at
www.blackrock.co.uk/its. We recommend you seek independent professional advice prior to
investing.
This material is marketing material. The Company is managed by BlackRock Fund Managers Limited
(BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services
to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the
London Stock Exchange and dealing may only be through a member of the Exchange.
The Company will not invest more than 15% of its gross assets in other listed investment trusts.
SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence.
Net Asset Value (NAV) performance is not the same as share price performance, and shareholders
may realise returns that are lower or higher than NAV performance.
The BlackRock Greater Europe Investment Trust plc currently conducts its affairs so that its securities
can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct
Authority’s rules in relation to non-mainstream investment products and intends to continue to do
so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s
restrictions which apply to non-mainstream investment products because they are shares in an
investment trust.
Any research in this material has been procured and may have been acted on by BlackRock for its
own purpose. The results of such research are being made available only incidentally. The views
expressed do not constitute investment or any other advice and are subject to change. They do not
necessarily reflect the views of any company in the BlackRock Group or any part thereof and no
assurances are made as to their accuracy.
This material is for information purposes only and does not constitute an offer or invitation to
anyone to invest in any BlackRock funds and has not been prepared in connection with any such
offer.
© 2022 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS and iSHARES are
trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other
trademarks are those of their respective owners.
