The European Green Deal: when macroeconomics matter

Macroeconomic factors do not normally play a significant role for stock pickers. However, says Stefan Gries, Co-Portfolio Manager on the BlackRock Greater Europe Investment Trust plc, the European Green Deal could be an exception, creating real opportunities across European markets.

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

A stock picking approach usually focuses on the qualities of individual companies, rather than the wider economic environment. However, occasionally, macroeconomic factors combine to create a uniquely favourable environment for certain sectors and companies, enabling them to deliver long-term resilient growth. We believe that the European Green Deal is one of these rare swing factors.

The EU has set a clear target to achieve carbon neutrality across the bloc by 2050, including tighter reduction in emissions by 20301. The European Green Deal has been created to facilitate this transition, mobilising €1 trillion over the next decade to tackle climate change2. Given its size and the very specific areas on which it is focused, we see it creating significant opportunities.

The European Green Deal is a rare exception to our premise that macroeconomics doesn’t matter for long-term success.

The ‘green recovery’

The European Commission has four near-term priorities for the green recovery: the roll out of renewables; the renovation wave; green mobility; and kick-starting the hydrogen economy. For businesses involved in these fields, the combination of government backing, financial resources and favourable regulation should create a uniquely fertile environment for growth.

Many of these areas are slow burn. The US has front-loaded many of its stimulus measures, but the EU has instead chosen to drip-feed capital. This suits our long-term agenda. For example, the increase in the renovation rate will be staggered – at 1.2% from 2023 – 2025, rising to 2% per year in 2026 - 20293. The renovation targets include tackling energy poverty, improving public buildings, such as educational, health care and administrative facilities, and decarbonising heating and cooling. We have found a number of companies likely to be significant beneficiaries, where the potential growth is not yet appreciated by the market.

On green mobility, an acceleration of electric vehicles is a necessity. This has consequences throughout the supply chain. For example, electric vehicles use around 5-6x the amount of semiconductor content. As investors, we need to understand whether we are at the beginning, middle or end of a sector’s business cycle. To our mind, this appears to be the beginning of a very long transition.

It should be said that the European Green Deal does not automatically make specific companies attractive. Hydrogen, for example, is an early-stage energy and while it promises to be exciting, it doesn’t yet have a significant end market. There is no dilution of our usual quality control measures: ensuring companies have a capable management team, a strong franchise and a sustainable business model. However, it does ensure that a key criterion – the strength of the end market – is fulfilled.

Build back closer

Europe also benefits more generally from a desire to relocate critical infrastructure and component manufacturing closer to home. The pandemic ruthlessly exposed the dangers of relying on Asian supply chains, particularly in areas such as chipmaking. Policymakers have realised that they need to build up domestic infrastructure and expertise. This can benefit individual companies because it can deliver policymaker support and draw in expertise.

These trends can also guide us on where not to invest. The decarbonisation of Europe will have its casualties. For example, it will be a headwind for some automobile groups that will need to invest billions in the transition to electric cars.  

We are also wary on the price we pay. Where there are these significant initiatives, it is important to maintain discipline, finding not simply the areas that will grow, but where that growth is underappreciated by the market. That won’t necessarily mean that a company is cheap, but it will mean that it is undervalued.

Occasionally, there are exceptional external forces that change the outlook for specific sectors and companies. The European Green Deal is a rare exception to our premise that macroeconomics doesn’t matter for long-term success. It is likely to deliver some exceptional opportunities.

1European Commission, January 2020
2Norton Rose Fulbright, April 2021
3European Commission, October 2020