BlackRock Greater Europe Investment Trust benefit from overweight exposure to risk assets, NAV up 6%

BlackRock Greater Europe Investment Trust plc (LON:BRGE) has announced it latest portfolio update.

All information is at 31 December 2023 and unaudited.

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Performance at month end with net income reinvested 

At month end

¹  Based on an interim dividend of 1.75p per share, and a final dividend of 5.00p per share, for the year ended 31 August 2023.

²  Excluding 17,116,777 shares held in treasury.
³  The Company’s ongoing charges are calculated as a percentage of average daily net assets and using the management fee and all other operating expenses excluding finance costs, direct transaction costs, custody transaction charges, VAT recovered, taxation, write back of prior year expenses and certain non-recurring items for the year ended 31 August 2023.

Commenting on the markets, Stefan Gries and Alexandra Dangoor, representing the Investment Manager noted:

During the month, the Company’s NAV rose by 6.0% and the share price was up by 7.8%. For reference, the FTSE World Europe ex UK Index returned 4.3% during the period.

Europe ex UK markets finished a very strong year for the asset class, defying concerns the region may slip into a recession. During December, the Federal Reserve signalled peak interest rates which reinforced hopes for rate cuts in 2024 and led to strong performance of risk assets. Real estate, industrials and basic materials saw the strongest returns, while energy, telecommunications and consumer staples underperformed the market.

The Company outperformed its reference index during the month, driven by both positive sector allocation and stock selection. In sector terms, the Company benefited from its overweight exposure to risk assets including industrials.

Zero exposure to energy, as well as a lower weight in defensive sectors such as consumer staples, telecommunications and utilities was also helpful. No exposure to real estate was negative for returns during the month. The sector rallied on hopes for lower interest rates going forward.

The best performers during December came from industrials and technology names. Even though there was limited fundamental news flow, several cyclical stocks were supported by falling rates, optimism around recovering real estate and potentially bottoming construction markets and growing consensus around a soft landing.

A position in Sika was the top performer during the month. Lower oil prices should be a positive for Sika’s margin in 2024 as oil is amongst their largest input costs. The company is also a beneficiary of lower rates.

Shares in Hexagon also aided returns as the company held their Capital Markets Day, reaffirming 2022-2026 targets which are for average annual organic growth of 5-7% and earnings before interest and taxes (EBIT) margin of >30% by the end of the period. Hexagon also committed to increased financial disclosure and proposed two new independent board members for their next AGM. 

DSV provided positive attribution with shares clawing back from recent weakness. There were no company specific updates, though shares were supported owing to the increasing complexity in logistics created by the issues in the Red Sea.

Shares in speciality chemicals distributor IMCD have continued higher since October when management said they expect to see an increase in volumes in Q4 2023 versus Q3 2023. Signs of demand bottoming and an attractive valuation make the 2024 setup attractive for the company.

Elsewhere in technology, a number of semi-conductor exposed names such as ASML and BE Semi benefited from the risk-on environment. Within health care, the portfolio’s position in Straumann had a positive attribution effect, benefiting as rate expectations fall but also from messaging coming out of pre-closes, conferences and sell-side interactions which are suggesting trading has held up well.

On the negative side, a position in Irish bank AIB Group was the single largest detractor over the month. Despite no negative fundamental news, many banks struggled given the outlook of falling rates. In our view, share price moves have been more dramatic than what net interest income cuts would look like, whilst valuations remain very attractive. Lower than current interest rates would still be considered a healthy level, in particular compared to the zero or negative interest rate environment that we have seen in the past. An improvement in macroeconomic conditions is also likely to be a positive backdrop for banks to re-rate, with earnings per share also supported by hedging, overlays and share buyback programmes.

Shares in Ferrari contributed negatively following comments from management who were looking to keep a lid on investor expectations. Shares have been extremely strong over the past year and recent sell-side analyst downgrades have been mainly based on high valuations.  Importantly, however, their order book remains at very strong levels covering the entirety of 2025, offering unparalleled earnings visibility.

Outlook

2023 was another eventful year but turned out a lot better than most market participants had feared: calls for a recession, weak China macro data, a US banking crisis in March and wars around the globe dominated financial news. Yet, European equity markets rose strongly.

Going into 2024, we remain fairly constructive on European equities as the set-up should be positive: inflation is on a downwards trajectory and the economy appears relatively robust. Eurozone inflation figures have fallen and whilst there may be volatility in month-to-month data, the economy can handle these levels of inflation. This also means that we have come to or are close to peak rates and, at some point, it is fair to assume interest rates will come down. We have already started to see a positive impact on falling mortgage rates in many European countries.

The corporate sector in Europe is healthy. There is limited corporate debt, margins are strong, there is no need for major layoffs and the end of the destocking across most industries is in sight. This in turn is good news for the consumer: a supply chain and energy crisis that is largely done, combined with high employment numbers and falling inflation suggest that the cost-of-living crisis has cooled off. This puts the region in a much better position compared to one year ago.

Nevertheless, the asset class has been under-owned ever since the Russian invasion of Ukraine in February 2022. As always in Europe, it is key to remain selective. Assessing the economy from the bottom-up can uncover areas for greater optimism than traditional economic indicators may suggest. Our regular contact with management teams helps us understand whether the direction of earnings and cashflows on a medium to long-term view for the companies in our portfolio remains on track.

Long-term structural trends and large amounts of fiscal spending via the Recovery Fund, Green Deal and the REPowerEU plan in Europe can also drive demand for years to come, for example in areas such as infrastructure, automation, innovation in medicines, the shift to electric vehicles, digitization or decarbonisation.

Valuations are attractive versus history and especially versus US equities. Overall, evidence of a resilient consumer, healthy corporate sector and decent outlooks underpinned by green stimulus, give us confidence that many of the companies in our portfolios can continue to weather the storm.

To discover more about the BlackRock Greater Europe Investment Trust click here