This page should be read in conjunction with the investment risks below.
Continental European equity markets advanced in the second quarter of 2018, masking a strong April then two months of decline. The formation of an Italian coalition government comprising two radical parties - Lega Nord and M5S – caught the market by surprise. Initial impressions of their plans and how these were to be funded caused further angst. A change in Spanish government, tensions between China-US (and potential implications on world trade) and immigration all added to these concerns.
In the three months to the end of June 2018, the fund returned 0.93%, under-performing the FTSE World Europe Ex-UK Index reference benchmark which returned 3.40% (£; total return). The fund’s peer group, the IA Europe excluding UK sector averaged a return of 3.67%.*
Despite the challenging performance there were some bright spots in the quarter. Our overweight exposure– relative to the reference benchmark – in the oil & gas sector proved positive for relative performance amid a backdrop of a higher oil price. More importantly, the sector continues to focus on returns, a key driver. Elsewhere our Telecoms overweight position, relative to the reference benchmark, made a positive contribution. After many years of headwinds, underlying operational performance for some of our holdings was encouraging and bodes well going forward.
Conversely there were negatives, which more-than-offset some of the positives. Industrials proved to be the worst sector on a relative basis where a couple of names, AP Moller-Maersk and Deutsche Post, detracted meaningfully. Escalating tensions between the US and China and the potential impact on world trade has seen both stocks penalised. For Deutsche Post we still remain positive despite some headwinds in the Parcels division, as Management have a robust plan in place to deal with these issues. For AP Moller-Maersk, the short-term environment in container shipping has worsened as the industry struggles to pass on higher fuel rates. More important to us is the longer term demand/supply outlook, which is gradually moving in the right direction. Financials were also a detractor as banks within Italy in particular suffered during May as political tensions rose, although insurance names were generally more positive.
In terms of portfolio activity during the quarter, there were only minor adjustments. Despite poor performance we see no reason to make any major changes as our fundamental convictions remain. We have marginally added to some of the positions which suffered from poor performance in Q2, and taken some profits from some of the better performers, namely within the oil & gas sector. Within financials, we sold out of German re-insurer, Munich Re, after a period of out-performance and marginally added to some Spanish and Italian banks, while also taking the opportunity to add to existing healthcare names.
|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.
|Standardised rolling 12 month performance (% growth)*
*All data is as at 30 June 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.
Strategy & Outlook
A number of issues in the last couple of months have questioned the cohesiveness and durability of Europe – a populist party taking the reins of power in Italy, Spain ejecting its Prime Minister, building tension over immigration and political squabbling within Germany’s coalition government. To get to the conclusion first, we do not believe that the eurozone is teetering on the edge of a currency break-up. Recent polls have shown that a majority of Italians want to retain the Euro. The market has done a lazy read-across from Italy to Spain: the Spanish situation is totally different. The new Socialist prime minister is from a mainstream pro-EU and pro-euro party. The minority government may not be long-lived, but current polls show strong support for centrist and other pro-EU parties, meaning that new elections would not be a market-unfriendly event.
Thus, it is our view that the market’s reaction to political events has been substantially overdone. Today, Europe is institutionally much better equipped to intervene and deal with any financial distress compared with the past. Moreover, financial conditions in Europe are very supportive for both consumers and corporates, and the banking system is much better capitalized and in a significantly healthier shape than few years ago. In addition, sound fundamentals continue to support the European economy as falling unemployment underpins domestic demand.
Therefore, we stick to our proven long-term investment approach driven by valuation. Based on our analysis, we do not see compelling rationale to modify the portfolio’s current stance as valuations are attractive in our view.
Subdued inflation in the eurozone remains a concern for some observers, but we see upward pressures from here, thanks to strong domestic demand and job markets. With sustained economic growth come nascent signs that wage and prices pressures are starting to rise. Recent inflation readings have shown a pick-up in headline and core inflation. In the UK, we see that Brexit-related risks appear to be largely reflected in valuations at this stage and find very interesting investment opportunities arising in a number of companies both internationally and domestically exposed.
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.
: 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.