Investment Trusts

Never mind the ballots

Europe’s political future may be uncertain, but the continent remains home to some of the world’s strongest brands and fastest-growing companies[i]. BlackRock’s portfolio manager Vincent Devlin, explains why Greater Europe still has much to offer.

What impact has the UK’s Brexit decision had on investment in the region?

The UK’s Brexit vote sent a wave of political and economic uncertainty across Europe. The referendum result came as a surprise to many people and led to a more cautious approach to investing in Europe – with more than $81bn of capital leaving the asset class in 2016[ii]. The upcoming French presidential and German federal elections add another layer of potential uncertainty. This is leading to hesitation from company management teams when it comes to investing in business projects. That apart, the economy has remained resilient and investment impact has thus far been minimal. While the UK is a prominent trading partner of Europe, it is not the only one. Many businesses in Europe are international and over 50% of earnings come from outside the continent[iii]. We believe there is scope for assets to return to the region, especially if company earnings trends remain positive. 

How have you been able to use political uncertainty and market volatility to your advantage in the past 12 months?

There is a careful and delicate interaction between the political picture and the Trust’s investment strategy. We analyse individual companies and take a view, but we also combine that with our own conscientious assessment of the prevailing political backdrop. We don’t put investors’ money to work unless we have thoroughly researched the company and formulated a share price target. That said, if we perceive the outcome of an election will result in a change in fortunes for a particular company based on our own research, then we may invest, but politics does not drive the investment process. The past 12 months has been challenging for the active investor in Europe, largely due to political surprise. While forthcoming elections in Europe could pose risks to the market in 2017, we also believe they could provide a catalyst for positive reform. This could occur, for example, if French presidential candidate Francois Fillon, who is championing a pro-growth reform agenda, is elected as President of France. 

In which sectors does Europe have globally competitive companies?

Europe is home to some outstanding global businesses. For example, the Trust invests in beverage companies such as Rémy Cointreau, which produces cognac that is protected by Appellation d’Origine Contrôlée. This competitive advantage means it cannot be replicated anywhere else in the world. The designation gives it strong pricing power over its rivals and the potential for greater returns[iv]. We also invest in French spirits producer Pernod Ricard and in Anheuser-Busch InBev, the Belgian-based brewing company. On the consumer side, we invest in global businesses such as Danish jewellery company, Pandora. The firm is building an impressive business that is able to sell from its own branded stores, something usually only managed by top-of-the-range names such as Tiffany or Cartier. In the industrial sector, we see opportunities in construction companies that are beneficiaries of the potential increase in infrastructure spending in the developed world and particularly from the US. An example is CRH, which derives approximately 50% of its revenues from Americas[v].

The banking sector has gone through some serious challenges lately – what is your outlook for financial services in Europe?

The Trust has the ability to invest in emerging European countries such as Poland and Turkey, giving us two different stories to tell about the banking sector. In developed Europe, the Trust has been avoiding investing in banks. The European Central Bank’s quantitative easing programme - where it effectively prints more money to increase supply in the economy - pushed down interest rates and bond yields (the returns on investing in bonds). This has made it much tougher for banks to make money on traditional lending. While bond yields have started to rise in developed markets as global growth is revised upwards, our fundamental research does not support the view that yields at current levels - or even the rise that the market currently expects - will increase banking profitability significantly in the short term[vi]. In emerging Europe, however, we see opportunities to invest in banks. Share prices for Turkish banks were very low in the wake of the failed coup last summer and so we invested in a Turkish financial institution to take advantage of the good value we thought this offered. We followed a similar strategy in Poland, buying shares in a Polish insurance business after investor concerns about the company’s future and the country’s political uncertainty had driven the share price lower.

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.

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

Shares are not especially good value in Europe relative to history, but this is true of much of the developed world[vii]. However, we do believe there are pockets of attractive value in developed Europe, such as in beverage companies, healthcare and capital goods businesses. Emerging Europe shares look to offer better value for money than the rest of Europe, and geopolitical dynamics may open up attractive opportunities. Russia may benefit from the election of Donald Trump as US president because his rhetoric suggests friendlier ties between the two countries.

BlackRock makes investment decisions based on thorough research of individual companies and by taking the wider political and economic landscape into account. To find out more about the opportunities Europe presents, visit here.

[i] Interbrand, January 2017
[ii] Lipper cross-border flow data, November 2016
[iii] BlackRock, 2017 based on latest company filings
[iv] Rémy Cointreau, January 2017
[v] CRH semi-annual filing August 2016
[vi] BlackRock, as at end of December 2016
[vii] BlackRock, January 2017