BlackRock Greater Europe outperforms reference index, driven by accurate sector allocation

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

All information is at 31 March 2023 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 an interim dividend of 1.75p per share and a final dividend of 4.85p per share for the year ended 31 August 2022.
2  Excluding 16,928,777 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 2022.
 

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

During the month, the Company’s NAV rose by 3.0% and the share price by 1.7%. For reference, the FTSE World Europe ex UK Index returned 0.9% during the period.

European markets were slightly up despite the extreme pressure US and European banks faced during March. Market attention first focused on the failure of US Silicon Valley Bank and quickly turned to Credit Suisse – which in our view is a completely different scenario. Nevertheless, both stories drove volatility during the month.

Despite the bank turmoil, the European Central Bank increased interest rates by 50bps, continuing their fight against high inflation. Whilst consumer prices in the Eurozone reached their lowest levels in over a year, rising 6.9% in March, compared to 8.5% in February – mainly thanks to falling energy prices, core inflation remains sticky. Excluding energy and food costs, core inflation was up 5.7% in March, slightly higher than the 5.6% we saw in February. Over in the US, the Federal Reserve also hiked rates by another 25bps.

Market leadership came from the technology, health care and consumer staples sectors, as investors fled to tech and more defensive areas. Real estate and financials were the weakest sectors during the month, followed by energy.

The Company outperformed its reference index, largely driven by accurate sector allocation. In sector terms, a lower allocation to financials was positive, as was the zero allocation to both real estate and energy. The Company’s higher allocation to technology, consumer discretionary and health care also aided returns. An underweight position in consumer staples detracted, although this was offset by strong stock selection.

The strongest relative contribution came from the Company’s technology holdings. Whilst there was limited stock specific news, investors moved back into longer duration types of stocks where the medium- to long-term investment cases remain intact. ASMi, BE Semiconductor, ASML and STMicroelectronics were amongst the top performers. STMicro shares were further supported as the CEO spoke at a conference during the month, highlighting a very strong backlog particularly from industrial and autos end markets where STM’s chips are used in silicon carbide inverters for electric vehicles.

Novo Nordisk was the largest single stock contributor over the month. Weekly US prescription data for their obesity drugs continued to trend well and shares reacted positively to a successful phase III trial for the high dose oral version of the treatment. Adding oral treatment options, in addition to injections, should help further adoption of this class of drug. Weight loss data from the trial also bodes well for upcoming phase III trials in oral based obesity treatments.

Several consumer stocks were amongst the strongest contributors. Luxury names LVMH and Hermès saw strong share price performance during the month as data showed both companies have had a very strong start to the year.

Within staples, shares in Royal Unibrew were stronger after months of weakness. We believe we have likely seen the trough in earnings downgrades and the combination of a product restock in Q2, positive pricing and tailwinds from commodity prices should aid shares going forward.

Finally, the Company’s limited exposure to banks helped performance. In particular, not owning BNP Paribas and ING Groep was positive for relative returns as all eyes were on the US and European banking sectors during the month. In the US, the collapse of Silicon Valley Bank was a classic bank failure situation for a non-systemic institution and US officials acted quickly to limit contagion. Meanwhile, in Switzerland, we witnessed Credit Suisse being taken over by UBS with an emergency loan and liquidity support from the Swiss National Bank after Credit Suisse’s share price fell dramatically and default protection costs jumped.

Despite limited exposure to the sector, we believe that after 15 years of stringent regulation, restructuring and capital rebuild, the banking system in Europe is in a better position than the turmoil would suggest and certainly is different to the US. We have not seen any significant deposit outflows in Europe, savings rates are approximately twice as high in Europe as the US, and a much higher percentage of European household financial assets are held in cash. In contrast to US banks, European banks have consistently been building deposits and are continuing to grow deposits. Cash deposits in European banks are 4x higher than in 2015 and debt securities are lower than in 2015. In this context, our positions in KBC and Finceobank were the largest relative detractors, as shares were caught up in this fear around the bank sector.

Elsewhere within financials, owning wealth manager platform Allfunds was negative as the company’s board rejected a takeover offer made by Euronext. Not owning a number of more defensive benchmark constituents including Novartis, Sanofi, Nestlé and L’Oreal also detracted.

Outlook

European equities have significantly outperformed other regions over the last six months, as the outlook for Europe has materially improved. The domestic energy crisis has been de-risked with prices down and storage levels high, and as one of the largest exporters to China, many European companies stand to benefit from the country’s ongoing re-opening. On the broader European financial system, despite recent volatility owing to concerns in US regional bank viability and the forced merger of UBS and Credit Suisse, there have been assurances from central bankers and regulators on the sector’s capital position, helping restore some confidence.

Despite year-to-date gains, the set up for the European equity market remains favourable relative to developed market peers such as the US, and European equities are still under-owned and valuations remain attractive.

Whilst there are a number of unknowns from a macroeconomic perspective, we see opportunities for attractive returns in select areas. Corporate balance sheets are in decent shape and in much better positions than in previous downturns. Many companies in Europe have spent the last decade deleveraging balance sheets and interest coverage is significantly higher than during the Global Financial Crisis or other prior periods associated with deep recessions or prolonged bear markets. Corporate spending intentions also remain healthy and this spend is often linked to transformational capex.

Lastly, long-term structural trends and large amounts of fiscal spending via the Recovery Fund, Green Deal and the REPowerEU plan in Europe can 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. We believe the portfolio is well aligned to many of these structural spending streams.

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