This page should be read in conjunction with the investment risks below.
The last three months have been difficult for the European markets as investor sentiment continued to worsen. Trade tensions, lower than expected economic data, falling oil prices and an array of unfinished political business have contributed to a rising sense of fear in the financial markets and increasingly volatile trading sessions.
Unfinished business lingers on the political front. In the UK, the Brexit debate has dragged on, leading the GBP to stay weak particularly against the EUR. There is some light at the end of the tunnel, however, as tensions around Italy have lessened substantially and the coalition government has yielded to European Community pressure to produce a more appropriate 2019 budget.
In the three months to the end of December 2018, the fund returned -11.1%, underperforming the fund’s reference benchmark, the FTSE World Europe Ex-UK Index, which returned -10.9% (£; total return), but outperforming the fund’s peer group, the IA Europe Excluding UK sector which averaged a return of -13.0%. *
Underperformance against the reference benchmark was largely driven by our overweight position in Financials, the worst performing sector in December. Within Financials, French bank BNP Paribas performed worst, with lacklustre results from the third quarter of 2018 partially to blame. Unicredit trailed closely behind.
On a stock specific basis, Renault was the largest drag on performance in part due to the negative sentiment surrounding the company after their CEO was arrested in Japan over allegations of financial impropriety, but also due to fears of a slowdown in the sector which has seen new-car registrations drop over the quarter.
Positive outperformance relative to the reference benchmark came primarily from our heavy overweight position in Telecommunications. This was followed by strong stock selection within the Health Care sector where our positions in Novartis and Roche led to a positive contribution in overall performance.
The overall shape of the fund has not changed significantly over the quarter. At month-end, Telecommunications stood as the largest overweight sector compared to our reference benchmark, followed by Oil & Gas, and Financials, while Consumer Goods and Technology remain the largest underweight positions.
|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.
*All data is as at 31 December 2018, 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 benchmark and other index information is source: Thomson Reuters Datastream, total return, GB£. Reference benchmark is the FTSE World Europe ex- UK index.
Strategy & Outlook
|Standardised rolling 12 month performance (% growth)*
It is easy to be influenced by all the gloomy headlines. What matters to us however, as fundamental, valuation-based investors, is to assess if the outlook is as negative as a company’s share price suggests. Even if things are only ‘less bad’, there can be significant opportunities to be had.
To us, the outlook for domestic demand and some normalization in Europe looks likely as it recovers from the various crises of the last decade. Wage growth, a key driver of inflation, is firmly on an upward trajectory, not just in Germany but in less-developed European countries too. Furthermore, some of the recent macro-economic weakness we’ve seen has been distorted by the disruption caused in the auto sector from the introduction of new Worldwide Harmonised Light Vehicle Test Procedure (WLTP) emissions regulations and most recently the political protests in France. Can trade tensions overshadow domestic demand? If there was an escalation of trade wars, this would almost certainly impact growth, but we cannot ignore the strength of domestic demand. This should provide some mitigation in a very negative scenario and leave the economy better placed to bounce back afterwards.
Despite recent concerns surrounding the Italian budget, Europe is a long way away from another Eurozone crisis. The coalition government has yielded to pressure from Brussels and agreed a 2019 budget that will avoid triggering the Excessive Debt Procedure (EDP) – the markets reacted favourably to this news with the 10-year Italian government bond yield dropping from around 3.2% at the beginning of December to about 2.7% by the end of the month. Looking forward into 2019, we suspect that Italy should not be the drag on European markets which it was in 2018.
We see many reasons to be optimistic that our fund positioning can come good as the new year progresses. It will then come as no surprise that the shape of the portfolio is little changed. Our approach has long been based on valuation: we look for mispriced stocks in all sectors of the equity market and we find that the disparities between stocks, sector and styles are particularly wide at present. Indeed, we believe there are some interesting opportunities to be found at the ‘value’ end of the spectrum, i.e. in undervalued companies. ‘Value’ doesn’t mean ‘bad companies’; we can find many quality businesses to invest in in a wide range of sectors. Overall, we remain optimistic about our positioning.
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.