A lot has been said about the concentration in the US markets, but investors in European markets have also been focused on a handful of companies. These ‘Granolas’ may be more diversified than the technology-focused Magnificent Seven – and not as expensive – but the focus on them suggests investors remain nervous about branching out. However, there are a few reasons this may change in the coming months.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
The Granolas comprise 11 index heavyweights: GSK, Roche, ASML, Nestlé, Novartis, Novo Nordisk, L'Oréal, LVMH, AstraZeneca, SAP, and Sanofi. Together they represent around one-quarter of the STOXX 600's market capitalisation1. They are large cap, global companies that have managed to transcend the recent weakness in the European economies. They often pay reliable dividends and have predictable earnings.
Investors in European equities have gravitated to these for their stability and consistency at a time when the world seemed uncertain. They have been worried about domestic recession, fragile geopolitics and the weakness in China. On the BlackRock Greater Europe Investment trust, we recognise the role these companies can play and hold a number of them in the portfolio.
New investment opportunities as European economic recovery continues
However, as European economic recovery emerges, and there is a potential cut in interest rates on the horizon, investors may have the confidence to explore new investment opportunities. We see a lot of capital in money market funds sitting on the sidelines2. As confidence improves, money moving out of these money market funds, and away from the Granolas, could spark opportunities elsewhere.
We are starting to see sentiment shift already. Fund flows into European equities have improved3. Where companies are delivering good earnings, markets are reacting strongly. As Europe and other global economies recover, there should be stronger contributions from different parts of the market.
There are plenty of under-explored areas of growth in European markets, left behind as investors have hunkered down in a handful of European large cap companies. For a number of companies, this has opened up a significant gap between market sentiment and the company’s operational performance. As active investors, this allows us to pick up good companies at lower valuations.
Structural growth opportunities
This environment has created opportunities for the BlackRock Greater Europe Investment trust. We continue to focus on areas of structural growth: this includes semiconductors, luxury goods and some of the industrial names, particularly those benefiting from rising capital spending on green energy and energy efficiency.
We think that the corporate sector in Europe is healthy, with low debt and strong margins. Management teams are optimistic about the potential growth trajectory for their businesses. That, in turn, should be good news for the consumer because it means employment is likely to remain high. The energy supply chain crisis is over and inflation is falling. These should all help businesses across the region.
That said, we are not blind to the risks. We retain some defensiveness in the portfolio. However, in the long-term, our view is that buying companies that are beneficiaries of major themes in the global economy insulates the trust against many short-term risks.
We believe an improving environment, and – potentially – falling interest rates may encourage investors to broaden their horizons in the remainder of 2024. This could see them look beyond the Granolas to the opportunities elsewhere in European markets.
Sources:
1 Euronews - Who are the granolas? A look at Europe’s magnificent seven - February 2024
2 Investment Week - Money market funds enjoy 'best year on record' with £4.4bn inflows - January 2024
3 Calastone - Bullish investors flood back to equity funds - February 2024
Risk Warnings
Investors should refer to the prospectus or offering documentation for the funds full list of risks.
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Description of fund risks
Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.
Currency Risk: The Fund invests in other currencies. Changes in exchange rates will therefore affect the value of the investment.
Emerging Markets: Emerging markets are generally more sensitive to economic and political conditions than developed markets. Other factors include greater 'Liquidity Risk', restrictions on investment or transfer of assets and failed/delayed delivery of securities or payments to the Fund.
Gearing Risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
Liquidity Risk: The Fund's investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Fund may not be able to realise the investment at the latest market price or at a price considered fair.
