BlackRock Greater Europe Investment Trust plc (LON:BRGE) has announced its latest portfolio update.
All information is at 28 February 2023 and unaudited.
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Performance at month end with net income reinvested
(20 Sep 04)
|Net asset value (undiluted)||2.0%||9.0%||3.2%||45.6%||654.1%|
|FTSE World Europe ex UK||0.9%||7.0%||10.0%||37.1%||379.7%|
Sources: BlackRock and Datastream
At month end
|Net asset value (capital only):||549.49p|
|Net asset value (including income):||549.54p|
|Discount to NAV (including income):||4.8%|
|Total assets (including income):||£555.0m|
|Ordinary shares in issue2:||101,000,161|
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.
|Top 10 holdings||Country||Fund %|
|LVMH Moët Hennessy||France||7.8|
Commenting on the markets, Stefan Gries, representing the Investment Manager noted:
During the month, the Company’s NAV rose by 2.0% and the share price by 3.0%. For reference, the FTSE World Europe ex UK Index returned 0.9% during the period.
After a strong start to the year, European equities also had a positive February, showing more resilience than other asset classes, although markets seemed to lack direction. Strong macroeconomic data and persistent US CPI data led markets to price out interest rate cuts in the US for this year. In Europe, a few more rate hikes are expected which, due to fairly low debt levels, should not raise major issues for the companies we own in our portfolio.
We are now close to the end of the Q4 earnings season and can report that the majority of our companies beat on expectations that had been cut too aggressively by the market. After four quarters of concerns over a recession hitting Europe and being one year into a significant rate hiking cycle, we continue to see many companies delivering decent results and the consumer being more resilient than expected.
As mentioned above, markets saw little direction during February which is reflected in market leadership: telecoms, financials and industrials delivered the strongest returns while real estate, technology and health care were down in absolute terms.
The Company outperformed its reference index driven by stock selection, although sector allocation was slightly negative. In sector terms, a higher allocation to industrials, as well as lower allocations to consumer staples and real estate, were positive for performance.
The Company’s overweight to both technology and health care was negative, although this was significantly offset by strong stock selection in both cases. An underweight allocation to financials detracted from relative returns.
The strongest relative contribution came from the health care sector. In particular, Lonza’s shares continued to bounce from their 2022 low after the company hosted a full year conference call in late January. Although 2023 guidance was lighter than we expected, there is likely some conservatism assumed in the numbers and the market seems to be looking forward to 2024 where management talk about high visibility into growth projects coming online and increasing effective utilisation of assets. The company also increased their dividend and announced a CHF 2bn share buyback programme over the next 24 months. Elsewhere, owning a position in Novo Nordisk contributed and not owning Roche also aided returns.
During the month, DSV was the top performer after having delivered strong 2022 results and better 2023 guidance versus consensus expectations. Markets had priced in weaker macro data, as well as freight rates coming down. Whilst this may be the case, DSV manage their cost base extremely efficiently and tend to guide conservatively. Despite share price weakness throughout 2022, the company reported a gross profit increase by 33% for the year with all business areas contributing positively.
A number of the portfolio’s semiconductor exposed companies continued to perform well. BE Semiconductor posted a strong order beat during Q4, with bookings coming in worth EUR180m versus consensus of EUR130m, resulting in a 39% beat. Shares in ASMi also continued to rise following good earnings in the previous month. Within financials, a position in KBC was amongst the best performers as the sector benefited from strong results, as well as buoyant outlooks for earnings upgrades and capital returns. Not owning Banco Santander and BBVA detracted from relative returns.
The single largest detractor was our holding in Chemometec following a set of disappointing semi-annual results which led to lower top line expectations for the full year. The manufacturer of cell therapy instruments saw a decline in order intake, particularly in the North American market which was impacted by subdued investment sentiment and subsequently weaker demand from capital-sensitive development companies. However, EBITDA has held up well and the company delivered an impressive 63% and 57% margin in the last two quarters. Whilst we do not believe the long-term opportunity has materially changed, the magnitude of slowdown was unexpected and we stay in regular conversations with management.
Elsewhere, Adyen saw share price weakness following a rather cautious full year guidance. This led to a downgrade of earnings expectations for this year, caused primarily by increased spending plans as the company looks to increase spend on hiring talent, which we believe will drive future growth prospects providing an attractive return on investment over time.
We expect equity markets to remain volatile in the near term as macro uncertainty remains elevated. Going forward, it will be important to see whether inflation comes down to levels the market can deal with. With energy prices having come down, there is reason to be hopeful this can be achieved. Clarity on the terminal rate of this hiking cycle would likely be enough to bring attention back to company fundamentals – the ultimate driver of long-term equity returns.
The market is forward looking and, at some point, will start to consider what a recovery could look like. For now, European equities remain under-owned and valuations are low. Some areas of the market, particularly within the cyclical sectors, have suffered a significant derating and signs of economic optimism such as easing inflation or a potential China re-opening, could help close some of these valuation gaps.
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, digitisation or decarbonisation. We believe the portfolio is well aligned to many of these structural spending streams.