European equity markets retreated in the first quarter of 2018. After a strong January, February's pullback began with rising inflation and interest rate concerns, while March's drop was caused by global trade worries and escalating tariff rhetoric between the US and China. Despite higher volatility in financial markets, macroeconomic fundamentals supporting the European economy remained strong. Unemployment continued to trend downwards in eurozone countries, spurring consumption. Private sector activity surveys came off multi-year highs but remained at healthy levels and continued to suggest economic expansion.
In the three months to the end of March 2018, the fund returned -3.1%, outperforming the FTSE World Europe Ex-UK Index reference benchmark which returned -4.7% (£; total return). The fund’s peer group, the IA Europe excluding UK sector averaged a return of -4.4%. *
Outperformance relative to the reference benchmark was largely driven by an overweight position in the financials sector amid a jump in government bond yields in the first two months of the year, combined with good stock picking. Unicredit, the Italian bank, led the sector given its high sensitivity to rising rates while Erste Group, the Austrian lender, also benefited from higher interest rates and good credit growth.
The oil & gas sector was another source of positive performance, led by Statoil, the Norwegian energy firm, which benefited from robust earnings and good progress in cost cuts. Elsewhere, Renault was the fund’s standout performer this quarter, after reports that Nissan, the Japanese carmaker, is eying a closer tie-up with the French company and looking to increase its stake in Renault. Meanwhile, some holdings within the industrials sector weighed on performance (e.g. Deutsche Post) amid an escalation of trade rhetoric in March and fears over global growth; yet we remain confident about the growth prospects and investment rationale of companies held in the fund.
Over the quarter, after an extended holding period and strong performance, we sold the position in Cap Gemini, in line with our valuation discipline. We started a new position in SAP, the German software firm, encouraged by what we see as good growth prospects especially in the cloud services space. We also added to some existing holdings within the health care sector where we believe most headwinds are already reflected in share prices, and where we see good prospects for growth from here. At quarter-end, oil & gas remained the largest overweight sector and consumer goods the biggest underweight sector relative to the reference benchmark.
|Performance (% growth)*
||Invesco Perpetual European Equity Fund
||FTSE World Europe ex- UK index
||IA Europe Ex UK sector
Past performance is not a guide to future returns.
Strategy & Outlook
|Standardised rolling 12 month performance (% growth)*
We continue to follow a disciplined long-term investment approach based on individual stock selection and driven by valuation, while taking into account the macroeconomic context. We see a high chance of another significant bout of money moving between sectors, benefiting the value end of the European equity market (energy, telecoms, banks, certain industrials). As active fund managers, our portfolio positioning aims to take advantage of these expected market developments. We believe this rotation is justified by a robust economic backdrop and the notable valuation differences between sectors in Europe. In addition, we see signs of a more convincing pick-up of inflation to come, which should favour our portfolio’s ‘pro-value’ stance.
Overall, we remain optimistic on the outlook for eurozone equities. Sound fundamentals continue to support the economic positivity in Europe: falling unemployment is underpinning domestic demand, monetary and financial conditions remain very favourable for both consumers and corporates, fiscal policy is modestly stimulative, while export demand remains solid and resilient to a stronger euro.
Moreover, after a number of years at depressed levels, corporate earnings growth is now also back with a very respectable pick up in 2017 and good signs for 2018 given the economic outlook suggested above.
Subdued inflation remains a concern for some market participants, but we see upward pressures from here, thanks to strong domestic demand and jobs market. With the accelerating economic activity come signs that wage and prices pressures are starting to rise.
On the political front, we continue to concentrate our analysis not on the alarmist: “what is possible?” but rather on the more realistic: “what is probable?”. Looking forward, we think it is unlikely that Continental Europe will be at the heart of market-disrupting geopolitical events this year and do not see severely malign market implications of political trends within the future EU of 27 states.
*All data is as at 31 March 2018, sourced from Invesco Perpetual 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. The figures do not reflect the entry charge paid by individual investors. 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.
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 Perpetual is a business name of Invesco Fund Managers Limited, Perpetual Park, Perpetual Park Drive, Henley-on- Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority.
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