BlackRock Greater Europe Investment Trust plc (LON:BRGE) has announced its latest portfolio update.
All information is at 31 January 2023 and unaudited.
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Performance at month end with net income reinvested
(20 Sep 04)
|Net asset value (undiluted)||8.6%||15.9%||-7.1%||35.5%||639.0%|
|FTSE World Europe ex UK||6.7%||14.5%||4.7%||28.5%||375.3%|
Sources: BlackRock and Datastream
At month end
|Net asset value (capital only):||538.45p|
|Net asset value (including income):||538.53p|
|Discount to NAV (including income):||5.7%|
|Total assets (including income):||£543.9m|
|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||8.3|
Commenting on the markets, Stefan Gries, representing the Investment Manager noted:
During the month, the Company’s NAV rose by 8.6% and the share price by 7.8%. For reference, the FTSE World Europe ex UK Index returned 6.7% during the period.
The market rally reflected lower energy prices, falling inflation numbers and the re-opening of the Chinese economy, of which the Eurozone is a major beneficiary. Indeed, European natural gas prices have been coming down sharply, whilst the winter so far has been mild on the continent and corporates have been able to reduce energy consumption. This means that gas storage levels in key industrial economies, such as Germany, remain high, giving us confidence for winter 2023. Lower energy prices have pulled Eurozone headline inflation down to 8.5% in January, compared to 9.2% in December, although core inflation (excluding energy) remains stickier.
With the Chinese government stepping away from its zero-Covid policy, markets expect the region’s economic activity to pick up significantly from Q1 onwards. With its best-in-class consumer, semiconductor and industrials businesses, the Eurozone is set to benefit from this trend.
Finally, the European Union released the official plan for the ‘Green Deal Industrial Plan for the Net-Zero Age’ or GDIPNZA – in response to the US Inflation Reduction Act. The EU’s plan aims to build on existing transition policies and regulation that should also accelerate investment.
Cyclical and rate-sensitive areas of the market led the rally during the month with technology, consumer discretionary and real estate delivering the strongest returns. Energy and defensive areas including utilities and health care were the weakest sectors.
During the month, the Company outperformed its reference index, driven by both stock selection and sector allocation. In sector terms, a higher allocation to the technology and consumer discretionary sectors was positive for performance. A lower weight to energy also aided returns as energy prices continued to come down. Lower allocations to defensive areas such as utilities and consumer staples were also positive. An underweight to financials was negative, as was a higher exposure to health care, although this was partially offset by accurate stock selection.
The Company benefited from its exposure to cyclical assets during the month. The semiconductor industry for example aided returns, driven by a better consumer outlook and solid results. ASMi delivered strong performance during the month. With EUR720m net sales, the Dutch chip equipment supplier posted stronger than expected preliminary Q4 sales numbers, beating guidance and consensus by 12%, driven by improving supply and a higher conversion of backlog. Orders during the month rose to products worth EUR820m, also beating expectations on the street. Management is confident stating that the ‘situation improved more than expected’.
ASML also reported stellar Q4 results. The manufacturer of photolithography machines guided to 2023 net sales to grow over 25% compared to 2022. Q4 net sales came in at EUR6.4bn with a gross margin of 51.5%. ASML currently has a backlog of EUR40bn which is circa 2 years of sales and the biggest backlog the company has ever had.
The Company’s position in LVMH was the top contributor to relative returns. Shares in Europe’s most valuable company were supported by the prospect of the re-opening of the Chinese economy and the subsequent ‘revenge spending’ of Chinese consumers. Similarly, our holding in Hermès contributed positively to returns.
After a very difficult year for Lonza’s shares, they bounced in January on solid 2022 results showing a second half beat on sales and margin versus consensus estimates. Their FY 2023 guidance came in slightly light compared to consensus but starting the new year on a conservative guide is not unusual for this company. In addition to results, management announced an increased dividend and a new CHF 2bn share buyback programme starting from H1 2023.
Negative contribution came from Chemometec as the stock continued to underperform in January. Shares remained under pressure following the announcement in December that the current CEO will be resigning later this year. Having met with the CEO and CFO, we were reassured by the clear message that the CEO is leaving for personal reasons and will stay on until a successor is found to make sure the handover is smooth. Overall, the business remains on track, well positioned in an attractive strong market where it continues to focus on top line growth.
Elsewhere in the sector, Novo Nordisk slightly lagged the strong market rally during January, after having performed very strongly over the past year. Finally, not owning banks including Unicredit and BNP Paribas, as well as consumer cyclicals L’Oreal and Kering, detracted from returns.
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 – and a potential peak – 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, digitization or decarbonisation. We believe the portfolio is well aligned to many of these structural spending streams.