The eurozone economy has been lacklustre, having suffered collateral damage from the US/China trade war. But Stefan Gries, Co-Manager of the BlackRock Greater Europe Investment Trust plc, argues central bankers are on the case and that there are plenty of high-quality companies with unique products or services to keep investors interested.
European economies have been caught in the cross-fire of the US/China trade war. This has hurt both economic data and sentiment. Politics have also been unhelpful, as the rising tide of populism has forced policymakers’ hands, stalling economic reform.
This has left European assets widely unloved by global investors. The most recent Merrill Lynch Bank of America Fund Manager Survey showed investors rotating away from areas they considered to be "cyclical", which included European equities.
We do not expect a significant revival in the global economy. Some resolution in the US/China trade talks would be welcome, but in our view, this will probably be a lengthy tussle about economic power across the globe and unlikely to be solved in the short term. A resolution on trade tariffs between the EU and the US, a Brexit deal and the Italian debt crisis would also be useful for European stock markets, but we are not holding our breath.
The monetary policy outlook looks more promising. Mario Draghi’s recent comments at the European Central Bank’s (ECB) annual symposium in Sintra, Portugal, that the bank could relaunch its €2.6 trillion quantitative easing programme if the economic outlook worsened, were well-received by markets. Christine Lagarde, Draghi’s likely successor, appears likely to continue the same policy. Further economic stimulus through tax cuts and spending is a possibility.
Stock market impact
However, the economy is not the stock market and we do not necessarily need any of these things to happen for share prices to make progress. More importantly, while sentiment towards European equities is still poor, it is creating opportunities. Valuations are lower. We are looking for quality companies, whose strength is not represented in their share price. There tend to be more of these to choose from when sentiment is weak.
When we are looking at a stock, we base our decision on a number of key criteria: we want to find those businesses with a unique product, brand or contract, which provides a competitive moat and allows a company to generate attractive returns. This needs to come with a quality management team with a clearly defined strategy for creating value from that unique product.
We accept that there will be times when these companies are in and out of favour. For example, during the recent bout of market volatility, the market favoured utilities as a "safe haven" asset in troubled times. While these companies undoubtedly have predictable earnings – people heat their houses whatever the economic climate, they carry high levels of debt and aren’t particularly profitable. This isn’t the type of business we want to hold even if it is seeing positive momentum in the short term.
Opportunities amid uncertainty
At the same time, at times of market dislocation, investors can overlook the type of companies we like. During the recent bout of turbulence, we bought Amadeus Group, a Spanish IT provider for the global travel and tourism industry. The recent volatility allowed us to add it to the portfolio at a more reasonable price.
The recent political disruption in Italy has had a particular impact on Italian assets. Investors, in general, have decided to look elsewhere rather than take the risk on Italian companies. This too has turned up some opportunities. We added a position in FinecoBank which has done well in a challenging environment for Italian financial services companies.
We find many of the companies in which we invest reporting "business as usual" in spite of the economic and political headwinds. A speciality chemical distributor which is successfully growing market share and pricing, for example, won’t necessarily feel the heat when the European economic environment weakens.
We cast our net wide when looking for companies. We can hold up to 15% of the trust in Eastern European domiciled companies. These add something new to the portfolio, diversifying it away from the largest developed economies in Europe and the Eurozone as a whole.
In markets that are flighty, we believe it is important to be selective and stick to the approach that has served us well over the years. European markets continue to face a number of challenges this year. We are exceptionally selective in our investments, looking for those companies which we believe are global leaders in their field and have enough resilience to withstand a more difficult environment.
For more information on this Trust and how to access the opportunities presented by European markets, please visit blackrock.com/uk/brge
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 Investment Week, June 2019
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