At the start of 2025, underlying economic conditions in Europe remain robust with consumer and corporate confidence relatively healthy. The Eurozone economy expanded 0.4% in the three months to September 2024, its strongest growth rate in two years1. It is expected to have retained its momentum in the final months of 2024. This suggests a positive backdrop for European equities at the start of the new year.
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.
Inflation has been picking up from its lows in September, but is some way below its peak in October 2022.3 The European Central Bank cut rates for the fourth time in December, and also signalled further rate cuts were possible.4
We believe there is likely to be further easing in 2025, with a series of consecutive cuts remain on the table, subject to a “data-dependent” approach. President Lagarde is taking an accommodative tone, particularly with the removal from the policy statement of guidance for rates to be "sufficiently restrictive for as long as necessary".
The jury is still out on whether the ECB will pause once the policy rate reaches a broadly “neutral” level of 2% in summer 2025. The ECB still has more room to cut interest rates than the Fed, given fewer inflationary pressures and the strength of the US economy.
Risks of investing in Europe in 2025
There are risks for investing in Europe in 2025. Despite encouraging signs of reviving private consumption, the euro area faces drag to growth from potential U.S. trade tariffs, rising geopolitical fragmentation and political uncertainty in some euro area member states. At the same time, China remains an important export market for some European companies, and its continued weakness may exert downward pressure. These factors may dent sentiment towards European equities in the near term, but any better news could see sentiment improve quite quickly. Equally, sentiment can be a powerful driver over short periods, but in our view the reality of earnings will always outweigh sentiment over time.
With an improving economic backdrop, we believe taking a degree of cyclical risk in European equities is appropriate, against the backdrop of what may come to be thought of as a growth scare during the summer. Profitability continues to be resilient in many European cyclicals (those companies with greater exposure to economic growth). It appears that their sensitivity to shocks and the domestic economy has been significantly reduced. Also, after a long hiatus, capital spending is back in place to support these businesses.
The focus of BlackRock Greater European Trust
The fund remains focused on Europe’s highest quality, fastest growing companies, irrespective of their size and geography. These are often global leading companies that are listed in Europe, and dominating their respective segments. This focus on quality growth companies has been out of favour in recent years, but we believe the outlook is stronger for this type of company in the year ahead. Valuations are attractive and there is also capital on the sidelines in money market funds that could move across if investors gained more confidence5.
On the BlackRock Greater European Trust, we believe the energy transition and growth of AI can support many industries, particularly within technology or industrials. We also detect a cyclical upturn in a variety of industries such as construction, life-sciences and chemicals, which have struggled with declining volumes for almost two years. These are presenting a range of long-term investment opportunities.
We recognise that some volatility is likely in the year ahead, particularly with speculation over potential tariffs. However, we remain positive on the outlook for BRGE, given the potential for an economic recovery and valuations in the European market at a record wide discount relative to the US.
Sources:
1 Trading Economics - Euro Area GDP Growth - December 2024
2 Trading Economics - Inflation CPI year on year - December 2024
3 Reuters - ECB cuts interest rates for fourth time this year - 12 December 2024
4 Funds Europe - Equity and money market funds’ demand grew in Q3 2024 - 20 December 2024
Trust-specific risks
BlackRock Greater Europe Investment Trust plc
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.
