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David Kimberley
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Updated 15 Mar 2024
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Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

It was another riveting week of events at Kepler Trust Intelligence, with three trust managers presenting to investors on different themes, all around the idea of a rapidly changing investment landscape. That included overlooked European companies, the energy transition, and an alternative to China.

Unloved Europe

An ageing population, poor productivity, and a lack of innovative businesses – this is the general impression you can get when speaking to anyone who is bearish on Europe. The reality is quite different, with the continent still offering a wide array of attractive companies, often trading at low valuations, probably in part because of that perception.

Stefan Gries, manager of BlackRock Greater Europe (BRGE), spoke to investors last week, starting off by noting that European stocks do continue to trade at low valuations relative to global peers. However, there are signs of a breakout as investors wake up to the opportunities that companies listed in the continent offer.

And the opportunities here are extremely broad, with leading companies across a range of sectors. Stefan noted that European companies are leaders in their respective fields, whether that be healthcare, semiconductors, or consumer goods.

One striking theme that Stefan touched on was reshoring. Much discussed in the media, there are real signs that governments and companies are making efforts to onshore more manufacturing roles. He also highlighted how increasing capex spent on AI is driving revenues for Europe’s semiconductor businesses.

A sector in transition

Next up was a presentation from BlackRock Energy and Resources Income (BERI). Managers Tom Holl and Mark Hume noted that the largest weighting in the portfolio is currently to mining companies, with smaller, similarly-sized weightings to the energy and energy transition sectors.

It was the latter sector that the managers looked at first. They noted that wind and solar are expected to provide close to 50% of the global electricity grid by 2050. Several tailwinds are working in the sector’s favour, namely the need for energy security, more favourable regulatory regimes, and – perhaps most beneficial of all – improvements in technology that have drastically reduced costs.

However, the managers noted that demand for gas is likely to remain strong over the coming decades as well, meaning the energy component of the sector is also going to be a significant contributor to returns as well.

An overview of the mining sector also offered some compelling arguments for investment. The managers noted that mining firms have extremely strong balance sheets, with debt to EBITDA ratios that are superior to even the tech sector average.

Also of note here was the demand that the energy transition is creating, whether it be for copper needed to power wind and solar facilities or the lithium and nickel required to create batteries used in electric vehicles.

Compounding this is the fact that capex in the sector has been at its lowest levels over the last three decades. The majority of investment is now in sustaining existing sites, rather than in expansionary activity. Readers can probably infer what the consequences of this might be.

The alternative to China

India has emerged as the star of the Asia and emerging markets universes over the last few years. Ayush Abhijeet, Investment Director at White Oak Capital, the investment advisor for Ashoka India Equity (AIE), showed us why.

AIE has been the best-performing India-focused trust since launch in 2018, delivering annualised returns of 18.1% from IPO to the end of February 2024. The trust is also unique in that there is no management fee and the managers are only paid 30% of outperformance delivered over three-year periods. Half of that fee is paid in AIE shares, which are locked up for a further three-year period.

Ayush talked through how the trust has managed to perform so well since IPO, highlighting the depth of knowledge they have within their extensive research team, many of whom have significant sectoral expertise. He also touched on the valuation analysis model the team have built in-house, as well as the strong emphasis the team place on managing corporate governance risks.

However, it was the title of the talk – If not China where else? – that arguably made for the most interesting viewing. Ayush highlighted India’s economic growth but also noted how this has been mirrored in equity markets, with annualised earnings growth of 20% in earnings from the start of 2021 through to the end of 2023.

One slide was particularly noteworthy, illustrating how much better Indian infrastructure has become over the last decade, with a halving of port turnaround times, a tripling in the amount of modern railway lines, and a doubling in the number of airports in the country. One manager at our emerging markets event last year noted that he has never seen such buzz and enthusiasm in India over almost three decades of investing in emerging markets. Ayush’s talk left us with the same impression.

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