BlackRock Greater Europe Investment Trust Regulatory News (BRGE)

BlackRock Greater Europe Investment Trust Plc - Portfolio Update

PR Newswire

London, March 22

The information contained in this release was correct as at 28 February 2022. Information on the Company’s up to date net asset values can be found on the London Stock Exchange website at:

https://www.londonstockexchange.com/exchange/news/market-news/market-news-home.html. 

BLACKROCK GREATER EUROPE INVESTMENT TRUST PLC (LEI - 5493003R8FJ6I76ZUW55)

All information is at 28 February 2022 and unaudited.Performance at month end with net income reinvested 

Sources: BlackRock and Datastream 

At month end

1 Based on an interim dividend of 1.75p per share and a final dividend of 4.55p per share for the year ended 31 August 2021.2 Excluding 15,628,527 shares held in treasury.3 Calculated as a percentage of average net assets and using expenses, excluding interest costs, after relief for taxation, for the year ended 31 August 2021.

Commenting on the markets, Stefan Gries, representing the Investment Manager noted:

During the month, the Company’s NAV fell by 8.1% and the share price by 8.8%. For reference, the FTSE World Europe ex UK Index returned -4.0% during the same period.

February proved to be a volatile month for the Europe ex UK market. So far this year we have seen various market narratives impacting return outcomes, with January starting with a sharp rotation towards value assets, as rising yields caused a mechanical derating of higher quality growth stocks. This was followed by the markets’ move to favour defensives, as central bank indication of multiple interest rate rises led investors to question the possibility of a policy mistake in an already slowing cycle. The focus on geopolitical developments took centre stage in February, as market attention turned to Russia’s invasion of Ukraine. Equity markets sold-off heavily, while commodity prices including brent crude oil, natural gas and wheat moved higher – as markets were quick to price in potential supply disruptions, as a result of the conflict.

During the course of February, all sectors in the reference index, apart from utilities, delivered negative returns. This was driven by markets’ risk-off sentiment. The Company’s higher allocation to technology and lower allocation to defensive areas of the market including utilities, telecoms and consumer staples detracted – while a lower exposure to financials and higher allocation to health care and industrials delivered positive results.

Largely as a result of the exposure to Russian companies, the Company underperformed its reference index. As of 31 January 2022, the Company held 5.7% in Russian stocks. Post-invasion, and at the time of writing in early March, Russian securities held by the Company are valued at close to nil. Consequently, both stock selection and sector allocation detracted from relative returns.

The Company’s positions in Russian companies were the largest detractors as the value of those shares fell between 43-93% in February. With the escalating conflict between Russia and Ukraine, several nations and international organisations introduced economic sanctions against Russian individuals and entities, along with the country’s sovereign debt. At the time of writing, the Central Bank of Russia has been sanctioned by the US, EU and Japan. As a result, roughly half of Russia’s $620 billion FX reserves are now frozen – this is a profound action and will generate a dollar liquidity squeeze in Russia, impacting external payments as well as creating risks around ability to meet dollar deposit withdrawals. To stabilise the domestic market, Russia’s Central Bank has hiked rates to 20% (from 9.5%) and is enforcing mandatory conversion of export revenues into Roubles. This has only been done three times before, in Iran, North Korea and Cuba, explaining the collapse in the Rouble exchange rates, as well as share prices of key Russian banks. A significant escalation of sanctions has increased the likely impact to Russia and the rest of the world. This could prevail for some time. BlackRock suspended the purchase of all Russian securities in active and index portfolios on 28 February 2022.

Regarding Developed European markets, the conflict is resulting in increased energy prices, sanctions and agricultural commodity prices to move higher. In our view, energy intensive companies are most likely to see downgrades as a result of increased costs, as well as auto makers and banks, whose revenue could be impacted by their limited ability to conduct business with Russia. In the vast majority of the Company which sits in Developed European assets, there is little exposure to these market segments.

Other detractors include LVMH, which sold-off despite there being no company-specific news. The business recently reported strong results and we see no fundamental issues with the stock. Elsewhere, the fact the Company does not own defensive assets such as Nestlé, Roche and Novartis, which are perceived safe haven assets, aggravated the underperformance of the portfolio over the course of February, as these businesses fared better during the month.

On the positive side, the IT sector was the largest contributor to relative returns, as pressures we saw in previous months abated with bond yields coming down. In particular, ASML, BE Semi and Adyen aided returns. Our positioning within health care was also positive, benefiting from better sentiment towards the sector, as well as some stock specific news.

Chemometec, a producer of machines for cell and gene applications, was the top performer providing a strong update. The company enjoyed accelerated growth, posting +60% year-on-year in H1 compared with their average annual growth of 30% delivered over the last 8 years. Three quarters of sales growth is coming from existing customers scaling up, making them a more resilient company operating in a fast-growing area of the sciences segment.

Novo Nordisk also contributed positively, posting improved guidance on capacity for their Wegovy weight loss drug: the company now expects to be able to fill 100% of scripts through H1 2022, compared with guidance of 60-90% given back in December 2021. They also hinted at third-party factory supply issues being resolved by Q2, which gives us confidence that the supply issues flagged late last year are largely behind them. Also, within health care, Lonza was amongst the top performers.

At the end of the period the Company had a higher allocation than the reference index towards technology, industrials, consumer discretionary and health care and an underweight allocation to financials, utilities, consumer staples, energy, telecoms, real estate and basic materials.

Outlook

It is important to highlight that many of our highest conviction names in the European market have significantly derated this year despite recent company updates showing strong earnings and positive outlooks for 2022. With the latest market drawdowns, we are getting to the point where many are trading on outer year valuations, too attractive to ignore. We are also keeping an eye on the European Central Bank as the impacts of the ongoing conflict are likely to increase fears of slower growth and could, therefore, cause policy makers to step back from the rate rise narrative that drove much of the market volatility at the start of the year.

In our view a number of Developed European quality assets that saw weakness during both the sharp value rally in January, as well as the geopolitical risks in February, are opportunities to top-up or add names from here. We aim to grow wealth for our clients over the medium to long term time frame. Where there is no change to long-term fundamentals and we see strong chances for earnings growth to come through strongly in the medium to long term, we look to add to positions. Our expectation for 2022 remains that the economy realises a mid-cycle slowdown, following a very strong recovery environment enjoyed throughout 2021.

Whilst we still see potential for greater normalisation in certain segments of the market and positive economic growth overall, some of the strong cyclical tailwinds, and indeed policy support, will fade through 2022. Rate markets and inflation expectations will continue to be somewhat volatile, but we do not expect policy in Europe to meaningfully change. We still see, however, the spending through the EU recovery fund as supportive for a number of the global leading businesses addressing digitization and the green transition, which are held in the Company. All in all, we expect greater dispersion between sector and stock outcomes and with that a need for greater discernment.

In our view, this framework will favour well-managed businesses with an element of pricing power, which are able to execute against a tougher market backdrop. We believe that holding these businesses will be to the benefit of our shareholders over the medium to long term.

22 March 2022

ENDS

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