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Signs of continental shift

With the risks associated with political instability starting to fade in the eurozone, shares from the region can offer value, says portfolio co-manager Stefan Gries, who explains what’s driving investment opportunities in Greater Europe.

Capital at risk. All financial investments involve an element of risk. Therefore, the value of your investment and any income from it will vary and your initial investment amount cannot be guaranteed.

Are you positive on the outlook for growth in continental Europe this year?

2017 turned out to be a stellar year for global economic growth. The Purchasing Managers Indices, regarded as a reliable gauge of economic activity, point to the synchronicity and breadth of this growth with almost 90% of countries reporting readings in ‘expansionary territory’ (above 52) (Thomson Reuters and Markit, November 2017). Continental Europe grew ahead of expectations and saw the unemployment rate fall to multi-year lows. This has aided consumer confidence, an important pillar of demand with household consumption and investment contributing 80% to GDP growth since 2013 (Source: Eurostat and BlackRock Investment Institute November 2017). A more constructive economic environment has supported equity returns over the year; the question then often becomes ‘but for how long?’ Whilst we recognise that the economic momentum in continental Europe could slow slightly in 2018, it is prudent to note that this comes from elevated levels. It is also important to note that on aggregate companies have delivered earnings growth in Europe for the first time in seven years. This positive inflection in earnings should, we believe, continue to support share prices. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Importantly, at this stage we think further economic growth will not fuel excessive inflation and as a result create a significantly higher interest rate environment. Whilst economic indicators have trended upwards, core inflation in the euro-area remains stubbornly below the European Central Bank’s target of 2%. We believe that spare capacity in the jobs market is the main culprit for dragging down inflation. Whilst unemployment has fallen, it remains above pre-crisis levels at almost 9% for the euro area (Eurostat, 31 October 2017). In addition, structural and demographic drivers, such as ever-increasing price transparency and a requirement to fund an aging population, are likely to keep a lid on inflation in the euro area. Therefore, without signs of overheating and with pillars of demand in place across the region, we believe the continental European economic recovery should remain on track in the coming quarters.

How does the economic environment influence the positioning of the Trust?

All holdings present within the Trust are initiated from bottom-up fundamental research undertaken by the 20-strong BlackRock European Equity team. We aim to run a concentrated portfolio with strong contention for capital allocation, ensuring we invest in what we perceive to be the best ideas in emerging and developed Europe. In an environment where growth has been robust, there is an opportunity for further catalysts to our initial investment cases: we view these as tailwinds as opposed to the driver of our decision making.

As a result of the current environment, the Trust has had a higher weighting towards industrial names. This exposure is across a breadth of underlying industries, including marine, where we have witnessed a positive turn in the marine cycle; construction and contracting, which benefits from increasing infrastructure spending; and freight forwarding, a beneficiary of increasing global trade.

As well as growth in developed markets, emerging market economies have proved robust through 2017, after contracting over previous years. Several European companies are positively exposed to these end markets, particularly those in the luxury segment. Whilst many companies struggle to exhibit pricing power, well positioned luxury brands have been able to increase pricing. This trend is particularly prevalent, for example, in China, where the clamp down on corruption, which impacted many companies selling expensive spirits and jewellery, is easing, leading to a pick-up in demand parallel to price increases.

The companies we invest in all share characteristics we believe are attractive in investments, such as quality management teams, attractive cash-flow profiles and an ability to invest in areas of growth present in their own business, via R&D spending for example, to unlock further earnings potential.

Does political risk in continental Europe concern you?

The 2018 political calendar in Europe is due to be far quieter than 2017 with fewer major elections. In our opinion, there is some need to be cautious over the upcoming Italian election, a region which has the least positive opinion on issues such as the Euro (Eurobarometer semi-annual survey, sourced from JP Morgan, November 2017). However, based on evidence we have seen thus far, we don’t believe the outcome would be particularly disruptive to markets. Ultimately, whilst political narratives may cause short-term volatility, we believe it is more important to assess a company’s earnings potential and other fundamental characteristics to generate potential returns.

What is your view on the price of shares for companies in Greater Europe?

On a relative basis Europe has underperformed its main sister market – the US – following the 2008 financial crisis (MSCI & Bloomberg, June 2017 (S&P 500 +255% in USD terms, Euro Stoxx600 +127% in USD terms – January 1 2009 to November 30 2017). That potentially creates a significant opportunity to find good value European shares versus those in the US. Equally, European equities remain attractive versus bonds, delivering a yield of 3.0% (Bloomberg, FTSE World Europe ex UK Index in GBP, 30th November 2017).

To find out about the increasingly positive outlook for this region and to learn more about BlackRock’s wealth of experience in Greater Europe, please visit here

Annual performance (%) to last quarter end (GBP) 31/12/16-
BlackRock Greater Europe Investment Trust Net Asset Value 20.50 14.88 13.63 -3.74 25.42
FTSE World Europe Ex UK TR GBP reference index 17.53 19.69 5.35 0.16 25.18

The figures shown relate to past performance.  Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

Source: BlackRock, December 2017.

Trust specific risks: Overseas investment will be affected by movements in currency exchange rates. Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore the value of these investments may be unpredictable and subject to greater variation. Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall. The Trust’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Trust may not be able to realise the investment at the latest market price or at a price considered fair.

The opinions expressed are as of January 2018 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative. There is no guarantee that any forecasts made will come to pass.

Important Information:

BlackRock have not considered the suitability of this investment against your individual needs and risk tolerance.

To ensure you understand whether our products are suitable, please read the Key Investor Documents (KIDs) and the Annual and Half Yearly Reports available at which detail more information about the risk profiles of the investments. We recommend you seek independent professional advice prior to investing.

Non-mainstream pooled investment products status.

The Company currently conducts its affairs so that its securities can be recommended by Independent Financial Advisers to ordinary retail investors in accordance with the Financial Conduct Authority (FCA) rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The securities are excluded from the FCA's restrictions which apply to non-mainstream investment products because they are shares in an investment trust.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

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