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David Kimberley
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Updated 17 Feb 2023
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Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by JPMorgan European Growth & Income. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

About $100bn flowed out of European equity strategies in 2022. With inflation and an energy crisis on the horizon after Russia’s invasion of Ukraine, it’s not hard to see why that was the case.

What transpired has been less catastrophic than many were predicting. European countries were quick to fill up their gas storage facilities prior to winter, which has proven to be about as mild as many could have hoped for.

Weaning themselves off Russian hydrocarbons has not been easy but nor has it proven to be as damaging as many predicted. New suppliers, as well as alternative energy sources, have either been found or are in the process of being tapped into.

This is not to say that it’s going to be smooth sailing from here for investors in Europe, only that events have not unraveled as terribly as many predicted they would. However, looking through the JPMorgan European Growth & Income (JEGI) portfolio, one can find some reasons to be cautiously optimistic.

The trust was formed last year via the merger of JPMorgan European Growth and JPMorgan European Income and is managed by Alexander Fitzalan Howard, Zenah Shuhaiber and Timothy Lewis. As its name suggests, the trust is managed for growth but it pays out a dividend equal to 4% of NAV at the end of its financial year, via four quarterly distributions.

The managers are not top-down investors. Instead, they look at a company’s quality characteristics, its valuation and then the outlook for the business, as well as the sustainability and consistency of its earnings. Any themes that do emerge from the portfolio are driven by this process, rather than the other way around. Nonetheless, those themes are worth paying attention to as they provide some indication as to why we may see a change in sentiment for European stocks in 2023.

One is the ongoing drive for renewable energy sources. The European Union’s strategy to reduce reliance on Russian energy, known as the ‘REPowerEU plan’, aims to have 45% of the bloc’s energy needs met by renewables in 2030 – more than double the 22% of today. Leaders on the continent appear keen to ensure homegrown firms benefit from any investment or subsidies that are needed to reach this target, in large part to compete with the US and China, which have put protectionist policies in place to boost their own domestic renewables sectors.

Schneider Electric is one JEGI holding that may stand to benefit from these trends. The French conglomerate makes energy storage and management products, including electric vehicle charging equipment, solar panels, and software to manage energy consumption. Beyond being in the right line of business, the company has already worked with EU policymakers on green initiatives and is a strong proponent of the bloc’s renewables policies.

Another firm that may see a boost for similar reasons is Boliden, a mining company that produces metals, like copper and zinc, which are a core part of the materials needed to produce renewable energy infrastructure.

Significantly its mines are all in Europe and thus less susceptible to the instability or political risk associated with other parts of the world. As with Schneider, the company has aligned itself with EU policy, noting in its May 2022 ‘Green Finance Framework’ that it sees metals like copper and zinc playing a key role in the bloc’s 2050 carbon neutral goals and its efforts to increase renewable energy production.

Away from a prospective energy transition, the reopening of China’s economy looks like it could benefit several companies in the JEGI portfolio as well. Luxury goods brands LVMH and Richemont are prime examples.

The former is JEGI’s third-largest holding and owns brands like Louis Vuitton and Dior. The company does not specify exactly how much revenue it generates in China but close to half of its sales are derived from Asia as a whole.

However, it’s worth noting that European sales were heavily skewed towards Chinese buyers prior to Covid. According to consultancy group Bain, two-thirds of Chinese luxury goods purchases were made outside of China in 2019, with Chinese tourists also being responsible for two-thirds of luxury goods purchases made in Europe during the same year.

Sales for LVMH did drop year-on-year in 2020 but bounced back to record highs in 2021. Significantly, the company noted in its most recent annual report that Chinese consumers were one of the major drivers, as they were quick to start spending again after the first wave of lockdowns ended. It’s plausible we’ll see this again in 2023 as consumers in the world’s second-largest economy emerge from lockdowns once more and also start travelling to Europe again.

A final point to consider is the global nature of many European companies. Companies in the MSCI Europe Ex-UK Index derive more than half of their revenues from outside of the continent. Retailing giant and JEGI holding Ahold is a simple example of this. The supermarket operator derives approximately 60% of its revenue from the US and has operations in Indonesia via a joint venture.

This isn’t an inherent positive, nor should it be particularly surprising given the quality of the companies listed in Europe. But the fact that many companies’ fortunes are not tied entirely to the European economy was not something which seemed to be factored into investors’ calculations during the course of last year’s catastrophizing.

Along with the other potential positives highlighted above, it should be something they consider as we head through 2023. If last year proved anything, it was that European countries can be much more dynamic than they’re given credit for. The same is true of the continent’s companies.

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