The update below is authored by Invesco and reproduced, with permission, by Willis Owen.
This page should be read in conjunction with the investment risks below.
Following a strong Q1 2019, European equity markets continued their rally to post another quarter of strong performance. But all was not smooth sailing as markets detracted significantly in May due to rekindled fears of a full-blown trade war between the US and China following Trump’s decision to blacklist Chinese tech giant Huawei. We started to see some easing of rhetoric in June and by the end of the month markets had recouped much of the prior month’s losses as investors remained hopeful that both presidents would move closer to a trade deal at the G-20 summit.
Growth was driven by the Services sector which saw its sharpest rise since November 2018. Meanwhile, the Manufacturing component remained under pressure as fears of a global slowdown continue to weigh on the sector.
Meanwhile, in his latest speech, European Central Bank (ECB) President Mario Draghi suggested that the Central Bank will further loosen monetary policy unless they see an improvement in economic data.
In the three months to the end of June 2019, the fund returned 5.3%, underperforming the fund’s reference index, the FTSE World Europe Ex-UK Index, which returned 8.8% (£; total return), and also the fund’s peer group, the IA Europe Excluding UK sector, which averaged a return of 8.7%.*
Past performance is not a guide to future returns.
Relative underperformance can be partly attributed to an underweight position in Consumer Goods, one of the strongest performing sectors over the quarter. This was coupled with some stock selection decisions, namely not owning Nestle, a large weighting in the benchmark which performed very well over the period.
Being overweight Oil & Gas was also a significant drag to relative performance as news of rising crude oil inventories and falling oil prices hit the sector.
At month-end, Oil & Gas stood as the largest overweight sector when compared to the reference index, followed by Consumer Services and Telecommunications. Meanwhile, our three largest underweight sectors are Consumer Goods, Utilities and Health Care.
|Performance (% growth)*
|| Invesco European Equity Fund (UK)
||FTSE World Europe ex- UK index
||IA Europe Ex UK sector
Past performance is not a guide to future returns.
|Standardised rolling 12 month performance (% growth)*
*All data is as at 30 June 2019, sourced from Invesco unless otherwise stated. Fund and sector average performance data is source: Lipper, Fund performance figures are shown in Sterling, inclusive of reinvested income and net of the Ongoing Charge and portfolio transaction costs. Sector average performance is calculated on an equivalent basis. Fund performance figures are based on the Z accumulation share class. Performance figures for all share classes can be found in the relevant Key Investor Information Document. Sector is IA Europe excluding UK peer group. Reference index and other index information is source: Thomson Reuters Datastream, total return, GB£. Reference index is the FTSE World Europe ex- UK index.
Strategy & Outlook
Notwithstanding the pullback in May, the rally in European indices year to date has failed to reignite appetite for the region. Europe still feels largely unloved as asset flows continue to move away from the region and “Shorting” European Equities – i.e. buying stocks at high share prices in the hope that they will fall – remains, to the best of our knowledge, one of the most crowded trades in global equity markets.
A number of risks are being cited (trade wars, recession fears, political concerns) as a reason for the negative sentiment towards Europe, however our fundamental analysis suggests that a lot of the perceived downside is already priced in – particularly so in areas of the market which we are more heavily exposed to.
In macroeconomic terms, the domestic demand picture remains robust and this is helping to offset some of the negative effects from trade. Elsewhere we are witnessing bank lending growth rising faster than it has for many years, something which is being overlooked by many.
Moreover, the decision to nominate Christine Lagarde as the President of the ECB seems, to our minds, a positive one. It’s too early to read the runes with any certainty on what precisely she’ll bring to the party, but comments by her whilst at the International Monetary Fund suggest that a copy and paste of the status quo is not a given.
Given our valuation-focused investment philosophy, it has made for a painful period in performance terms. We continue to find the most attractive valuations at the ‘Value’ end of the spectrum. ‘Value’ doesn’t mean bad companies, nor does it mean purely financials; we can find many good businesses with strong balance sheets and well-covered dividends at attractive valuations in a wide range of sectors.
Our conviction remains extremely high that following a valuation discipline is the best way to control long-term risk for our clients.
The value of investments and any income will fluctuate (this may partly be the result of exchange-rate fluctuations) and investors may not get back the full amount invested.
The fund may use derivatives (complex instruments) in an attempt to reduce the overall risk of its investments, reduce the costs of investing and/or generate additional capital or income, although this may not be achieved. The use of such complex instruments may result in greater fluctuations of the value of the fund. The Manager, however, will ensure that the use of derivatives within the fund does not materially alter the overall risk profile of the fund.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.
This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
For the most up to date information on our funds, please refer to the relevant fund and share class-specific Key Investor Information Documents, the Supplementary Information Document, the Annual or Interim Reports and the Prospectus, which are available using the contact details shown.
Invesco Fund Managers Limited, Perpetual Park, Perpetual Park Drive, Henley-on- Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.
: Willis Owen do not give investment advice so you will need to decide if an investment is suitable for you. If you are unsure whether to invest, you should contact a financial adviser. The views and opinions contained herein are third party and may not necessarily represent views expressed or reflected by Willis Owen.