BlackRock
Updated 10 May 2024
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Disclaimer

This is a non-independent marketing communication commissioned by BlackRock. 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.

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.

2023 was another eventful year in European stock markets: investors had to navigate intense speculation over the path of interest rates and inflation, fears over recession, a weak revival from China and a banking crisis. Ongoing geopolitical tensions adding to a difficult backdrop.

However, the year turned out a lot better than most market participants had feared. An energy crisis in Europe did not materialise, inflationary pressures ebbed, and by the end of the year sentiment had picked up on the hope of central bank rate cuts in the year ahead.

European economic growth

Looking to 2024, while there remain a number of challenges, there are reasons to be optimistic about the Eurozone economy. Inflation appears to be on a sustainable downward trajectory. There may be volatility in month-to-month data, and wages may provide further pressure, but on balance, we believe the economy can handle these levels of inflation.
This means interest rates are likely to be at their peak and, at some point during the year, are likely to fall. Mortgage rates have already started to fall in many European countries. This eases pressure on households.

The corporate sector in Europe also appears to be in good health. There is limited corporate debt, margins are strong, and to date, there has been no need for major layoffs. The end of the destocking cycle is in sight across most industries.

This is also good news for the consumer: a supply chain and energy crisis that is easing significantly, combined with high employment numbers, and falling inflation suggest that the cost-of-living crisis has eased. The region is now seeing significant growth in real incomes.1

European stock market investment

In spite of this relatively benign backdrop, European equities have been under pressure since the Russian invasion of Ukraine in February 2022. While central bank action, geopolitics, and elections will doubtless consume the airwaves in the year ahead, the opportunities in European markets are broad.

We find a significant number of European equities trading extremely cheaply relative to their long-term averages for consideration in the BlackRock Greater Europe Investment Trust. This, in our view, can provide a wider opportunity set for investors. However, while a peak in interest rates is likely to support overall market levels, this will not be sufficient to identify areas which might outperform.

As always in Europe, it is key to remain selective. Long-term structural trends and large amounts of fiscal spending via the Recovery fund2, Green Deal3 and the REPowerEU4 plan in Europe are likely to drive demand in areas such as infrastructure, automation, innovation in medicines, the shift to electric vehicles, digitisation or decarbonisation.

European equity stock selection

But bottom-up evaluation of individual opportunities is crucial when investing in European companies. We continue to look at metrics such as cash flow, return on capital and earnings momentum to build a better understanding of investment opportunities. We want to find companies achieving absolute growth in their capital employed organically or through acquisitions, and those that can improve returns through better margin management.

We find more companies that fulfil our criteria on BRGE among small and mid cap companies today. European small cap equity valuations sit at a 10% discount relative to European large caps.5 Small and mid cap stocks typically underperform in the early stages of an earnings slowdown, as we witnessed through the latter parts of 2022 and into 2023, but history implies stronger momentum for these stocks during periods of earnings recovery. We believe this is likely to be the backdrop for the year ahead.

European equity valuations are attractive versus history and especially versus US equities. Overall, evidence of a resilient consumer, healthy corporate sector and decent outlooks underpinned by green stimulus, giving us confidence for the year ahead.

1 IMF - Europe’s Wage Rises Are Aiding Recovery but Economies Face Risks - November 2023

2 The Recovery fund is a €800bn plan designed to transform European economies in the wake of the pandemic, creating new industries, opportunities and jobs - https://commission.europa.eu/strategy-and-policy/recovery-plan-europe_en

3 The Green Deal is a set of proposals to make the EU's climate, energy, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels - https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal_en

4 The Repower EU plan was launched in 2022 in the wake of Russia’s invasion of Ukraine. It is designed to save energy, produce clean energy and diversify the region’s energy supplies - https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal/repowereu-affordable-secure-and-sustainable-energy-europe_en

5 MSCI - MSCI Small Cap index - 31 January 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.

Emergig 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.

Important Information

In the UK this is issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

UK Investment Trust Funds: This document is marketing material. The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence.

Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.

The investment trusts [listed below/above/in this document] currently conduct their affairs so that their securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to nonmainstream investment products and intend to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are securities issued by investment trusts. Investors should understand all characteristics of the funds objective before investing. For information on investor rights and how to raise complaints please go to https://www.blackrock.com/corporate/compliance/investor-right available in local language in registered jurisdictions.

BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at www.blackrock.co.uk/its. We recommend you seek independent professional advice prior to investing.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy. This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2024 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS and iSHARES are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

MKTGH0424E/S-3437352

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