BlackRock Greater Europe Investment Trust outperformed its reference benchmark in August

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

All information is at 31 August 2024 and unaudited.

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

Performance at month end with net income reinvested

Sources: BlackRock and Datastream 

At month end

1  Based on a final dividend of 5.00p per share for the year ended 31 August 2023 and  an interim dividend of 1.75p per share for the year ended 31 August 2024.

2  Excluding 18,596,777 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 Net Asset Value (NAV) rose by 2.0% and the share price declined by 1.6%. For reference, the FTSE World Europe ex UK Index had returned by 1.5% during the period.

August was marked by significant market volatility, primarily triggered by a weak US jobs report that raised concerns about a potential downturn in the US economy. This was compounded by the unwinding of the yen carry trade, leading to a substantial decline in Japanese markets, spreading concerns globally. However, the situation quickly stabilised as better economic data and a dovish message from Fed Chair Powell at Jackson Hole reassured investors.

During the month, we saw a continued rotation out of cyclical stocks into defensive ones which we had started to witness in the prior month, as investors expressed a preference for safer assets amidst the uncertainty. Real estate, communication services, healthcare and utilities were the strongest performers while technology shares fell the most.

Despite the turbulence, European markets managed to hold up well. The Company outperformed its reference benchmark, largely driven by strong stock selection.

In sector terms, the portfolio’s zero exposure to energy aided returns, as did a higher allocation to consumer discretionary. The higher allocation to cyclical sectors such as IT hurt relative performance. An overweight to industrials was also negative although offset by accurate stock selection. Lower weights in defensive sectors including telecoms and consumer staples were negative during August.

Ferrari was the top performer during the month thanks to very strong Q2 earnings with revenues 7% and EBIT 9% ahead of expectations, driven by both product mix and higher than expected personalisation revenues. The average selling price increased by 14% to EUR 423k and the order book remains full providing earnings visibility through 2026.

IMCD, a global distributor of specialty chemicals and ingredients, started to recover from its previous underperformance after delivering better-than-expected results. The company achieved a slight beat on gross profit and EBITA, as it enters a period of normalised comparables, driven by M&A and a gradual recovery in the Americas business.

Adyen shares also gained after an H1 2024 report with results in line with consensus estimates across metrics. Revenue growth of 23.6% came in above consensus expectations which were looking for 21-23% organic sales growth, which helped to alleviate much of the bear case concerns. Management also spoke to the positive impact from hires made in 2023 and a longer client pipeline adding to visibility.

Similar to what we observed in July, the technology sector was the largest detractor in August, with ASML and ASMi among the most affected. Despite semiconductor companies delivering robust Q2 earnings, shares were impacted by concerns over the return on AI investments, potentially peaking hyperscaler capex, and possible restrictions on selling to China. Intel’s (not held) warning about cutting capex spend caught the markets attention but will have limited impact on 2024 earnings for the semiconductor companies we own. While there is still no clarity on the return on AI investments, the race to build the best AI infrastructure is still in its early stages, and there remains a strong push to stay at the forefront.

Elsewhere in the sector, a holding in STMicro dragged on relative returns following cuts during their Q2 update in July, bringing down full year sales guidance as well as 2024 and 2025 EPS. With our thesis of an improved business with greater margin resiliency through cycle challenged by the update, we are reassessing the position.

Within healthcare, owning Lonza detracted with shares down marginally in August after a >20% gain the previous month on the back of positive first half results.  We remain pleased seeing the acceleration in sales momentum and profitability beat come through following the earlier qualitative update, leading to increased confidence in managements’ execution and communication.

Finally, RELX experienced some weakness in August after having shown strong performance earlier in the year. Although there was no specific stock-related news, it is likely that the shares were volatile as RELX is considered an AI winner, and profit taking in this segment was broad based during the course of the month.

Outlook

As economic momentum gathers pace and company guidance strikes a more optimistic tone, Europe has come into the spotlight. The European Central Bank’s decision to cut rates was taken positively, although the jury remains out on the speed rates fall from here. Whilst this rate change is positive for asset class sentiment, operationally we see limited impact on companies.

Rising political discontent, however, has been a thorn in the region’s side. Geopolitical tensions around tariffs and elections as well as weaker macro data in the US and China have added a degree of uncertainty. We take confidence in the changed regulatory landscape for banks in helping manage perceived contagion risk that could arise from potentially weaker fiscal positions; and believe the negative impact of tariffs would only be meaningful for a small group of companies. Whilst uncertainty on policy outcomes remains, we believe the growth impact is likely limited in the near-term and economies should continue their positive inflection.

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. European Equities remain attractively valued versus history and especially so in comparison to the US. Overall, evidence of a resilient consumer, a healthy corporate sector and unchanged outlook for structural investment spend in key segments of the market should be supportive for the companies held in the portfolio.

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