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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.
Eurovision 2021
We highlight potential opportunities within the European investment trust space…
Update
03 February 2021
Europe, despite its intention to put past crises to rest, may end Analysts:
up being a major economic flashpoint in 2021. With sudden
David Johnson
developments in Italian politics, battles over vaccinations and
bonds that guarantee a loss, investors may be forgiven for
expecting the once benign region to be the next big source
of volatility. Yet there is an equal argument for a European Kepler Partners is not authorised to make recommendations
renaissance with pan-European stimulus, attractively valued to Retail Clients. This report is based on factual information
equities and increasing demand for sustainable investing; the only.
argument is not quite as simple as it seems. In this note we aim to The material contained on this site is factual and provided
highlight key data-points and issues which are likely to determine for general informational purposes only. It is not an
near- and long-term returns from European equities. We hope to invitation or inducement to buy, sell or subscribe to
highlight the possibility that European stock markets may be full any product described, nor is it a statement as to the
of opportunities, even if the macro outlook is cloudy. suitability or otherwise of any investments for any person.
The material on this site does not constitute a financial
promotion within the meaning of the FCA rules or the
Political infighting financial promotions order. Persons wishing to invest in
any of the securities discussed in the website should take
their own independent advice with regard to the suitability
of such investments and the tax consequences of such
Fig.1: Aggregate Italian Polling Data investment.
Opportunities Trust (JEO), which has a 0% weighting
to Italy. JEO trades at a 10.6% discount and has a
strong track record, although it has suffered from
the fallout from Wirecard’s collapse. JEO’s manager
(Alexander Darwall) prefers to invest in European
countries with global exposure rather than those
sensitive to domestic factors, further insulating JEO
to domestic Europe’s political and broader domestic
Source: Europe Elects, as at 22/01/2021 risks. Political risk won’t stop with Italy though, as
Germany has its next federal election in September
Italy is starting 2021 off with a bang, thanks to the resignation this year, the first election without Angela Merkel
of its prime minister Giuseppe Conte. Having survived two leading the CDU for 16 years.
confidence votes but losing his governing majority after the Italia
Viva party withdrew their small support (they took issue with
Italy’s handling of the crisis), Conte’s resignation is a calculated
Europe may be behind us
gambit in order to build a new majority coalition. Yet it is on vaccines…
nonetheless a gamble, and as recent British politics have shown,
such gambles have the potential to backfire. If 2020 made one thing very clear, it is that Europe
has failed to get a handle on COVID-19. Despite
While Conte remains Italy’s most popular politician, the polls are lockdowns, campaigns and a plethora of fiscal
showing a tightening of support across the major parties, with stimulus to incentivise people to remain indoors,
the right-wing populist party Fratelli d’Italia gaining ground at Europe is still facing the worst wave of COVID-19
the cost of M5S and the Lega Nord, the two incumbent parties. infections yet. The only practical solution to the
Rarely is there any winner during times of political volatility, and pandemic is mass vaccinations, something Europe
so it may be prudent to seek opportunities in strategies with is well behind the curve on when compared to the
a fundamental underweight to the country, such as European UK and the US. If recent headlines are anything to go
Kepler Trust Intelligence is written and published by the investment companies team at Kepler Partners.
Visit www.trustintelligence.co.uk for new investment ideas and detailed thematic research every week. 1
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.
by, expect the region to remain behind the curve as Europe managers, especially in some recovery stories. Of course,
continues to joust with the pharmaceutical giants over its this depends on the course of the vaccination programme,
access to the valuable vaccine. While Europe ‘demands’ which could confound the IMF’s expectations.
AstraZeneca divert vaccines from the UK to the Continent,
we doubt it will be as easy as that. If Europe’s demand for While any European strategy stands to benefit from
vaccines becomes a genuine threat to the UK’s vaccination an economic rebound, those with greater exposure to
programme, the UK may respond with the same export the domestic economy and to European consumers are
restrictions Europe has already enacted, adding further the most likely to outperform during a rebound. This
uncertainty to Europe’s COVID-19 exit plan. includes European small- and mid-cap strategies, such
as European Assets Trust (EAT), as well as those exposed
Fig.2: Vaccines Administered Per 100 People, to economically sensitive sectors, like BlackRock Greater
Per Country Europe Investment Trust (BRGE). BRGE’s investment
universe includes developing Europe, and it is heavily
Vaccines administered per 100 people, per country
01/12/2020 - 28/01/2021
exposed to the region’s high-quality manufacturers,
15
allowing it to capitalise on both the sectoral and regional
recoveries. Despite its wide reach it is a quintessential
Vaccines administered per 100
stock-picker strategy, preferring to focus on corporate
10
fundamentals rather than macro factors, thus allowing
investors to benefit from the broader European recovery
5 without being exposed to unnecessary risks. Conversely,
EAT offers investors a portfolio of high-quality European
small and mid-caps. Despite its high exposure to Germany
0
14. Dec 28. Dec 11. Jan 25. Jan and Sweden (amongst the nations least impacted by
Austria China Denmark France
COVID-19), it still trades at a 9.5% discount, a potentially
Germany Spain Netherlands Ireland attractive entry point for a COVID-19 recovery trade.
United Kingdom United States
everviz.com
Outside of the economic upside, EAT offers investors an
Source: Our World in Data, as at 29/01/2021 attractive yield, with 6% of the NAV paid out as income
annually. We believe that this gives income investors the
…But it retains the edge on ability to take advantage of a potential small-cap rally
without sacrificing yield.
growth
Lower for longer
Fig.3: Developed Europe GDP Growth
And Predictions
Fig.4: Aggregate Nominal Yields Of AAA-Rated
Developed Europe GDP growth European Government Bonds
Spain
Italy
Average nominal yield of 10-year AAA European Government
Portugal issued bonds
France
United Kingdom 06/09/2004 - 22/01/2021
Belgium 6
European Union
Austria
Germany
Netherlands 4
Sweden
Denmark
World
2
%
Finland
Ireland
-14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 10
0
%
2020 2021
-2
everviz.com 2006 2008 2010 2012 2014 2016 2018 2020
Source: IMF, as at 30/11/2020 Yield
While Britain may have the edge on the vaccine roll-out, Source: European Central Bank, as at 22/01/2021
the aggregate impact of COVID-19 on economic output
has been worse for the UK than for the eurozone, as can European yields have long been on a downward path, with
be seen by the above data from the IMF. The forecast the European Central Bank (ECB) having needed to contend
economic rebound is also higher in many European with anaemic growth and low inflation for nearly a decade
countries, which may provide opportunities for fund now. The great inflection point for European interest rates
Kepler Trust Intelligence is written and published by the investment companies team at Kepler Partners.
Visit www.trustintelligence.co.uk for new investment ideas and detailed thematic research every week. 2This 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.
was undoubtably in July 2012, when the then president of The Next Generation EU recovery fund, a €750bn stimulus
the ECB Mario Draghi famously said he would do “whatever package, is a monumental moment for the bloc. While it
it takes” to save the euro. Since then, “whatever it takes” brings a much-needed jab in the arm to the EU economy
has become the catchphrase synonymous with European (although it pales in comparison to the fiscal stimulus
central bank policy, which has been one of near endless being rolled out by the US), what matters more is where
monetary stimulus. While ten-year AAA-rated bonds issued it is invested and how it is funded. The stimulus is funded
by European governments have flirted with negative by the first ever issuance of a common Eurobond, the joint
nominal yields for many years, 2020 finally pushed them debt issuance by the EU member states. This has been the
over the edge. The sudden surge in stimulus, combined white whale of Europe for many years, as the wealthier
with pandemic-induced fear, sent ten-year nominal AAA nations have previously been hesitant to guarantee the
yields firmly into the negative. debt of the poorer nations, but this could ultimately prove
the linchpin in a more united European economy. While the
As more and more European bonds now guarantee short-term impacts are relatively small, such unity could be
investors a loss (even without considering the effects of the first step in a stronger European economy, which may
inflation), equities become an increasingly promising support long-term growth.
investment, given the declining opportunity cost. This
is more the case for growth-orientated investments: as The second potential tailwind from the recovery fund is
bond returns (as well as many equity returns thanks to more specific and relates to how it is targeted, with the
COVID-19) become ever more scarce, companies with lion’s share of the fund being allocated to digital and
strong growth potential become even more attractive. sustainable trends, with at least €250bn and €135bn of
Negative interest rates also make the carry trade (whereby the Cohesion Policy, Recovery and Resilience facility being
investors take out debt at rock-bottom rates and invest it in allocated to each respectively. This opens up a host of
high-yielding equities) increasingly more appealing – and new opportunities within Europe and will make inroads
profitable. There are several growth-focussed investment into securing the region’s sustainability. We expect the
strategies with a high exposure to Europe, such as Martin dedicated environmental strategies, like Jupiter Green
Currie Global Portfolio Investment Trust (MNP), which Investment Trust (JGC) and Impax Environmental Markets
could benefit from the low-rate environment. MNP offers Trust (IEM), to be the most obvious beneficiaries. IEM
a high-conviction portfolio of global equities, with the has been a mainstay of the environmental investing
manager increasingly bullish on Europe’s high-quality (and space, having been launched in 2002, and has been
expensive) consumer goods producers, like Ferrari and consistent in its objective of profiting from the transition
Massimo Dutti. MNP’s long-term outperformance has only to a sustainable future. With a 30% exposure to European
been improved upon by its manager Zehrid Osmani, who equities, it retains a substantial exposure to the tailwinds
joined in 2018, thanks to his forward-looking approach resulting from the recovery fund. With its exposure to
and sophisticated investment process. The quality growth sustainable small and mid caps, IEM offers a unique
bias has been a long-term trend for MNP, which we see exposure to companies which are unlikely to be on
as making it a major beneficiary of the declining-rate the radar of its global peers, or even that of dedicated
environment. European managers. In a similar vein, JGC offers investors
a portfolio of companies offering solutions to the world’s
environmental challenges. JGC also offers investors a
All for one, one for all high exposure to sustainable European companies, with a
43% exposure to the region. JGC has recently undergone
Fig.5: Breakdown Of The Next Generation EU a change in manager, with Jon Wallace taking the helm,
Recovery Fund which we outline in detail in our recent flash update. Jon
is increasingly positioning JGC towards what he believes
are the ‘accelerator’ and ‘innovator’ companies in the
environmental space: those with some of the highest
growth trajectories. We expect such companies to be
squarely in the sights of the recovery fund as Europe looks
to further expand its sustainability industry.
Unlucky in love
European investors can be an odd bunch, despite their
regional pride they seem to have far more love for America
and Asia, at least when it comes to equity funds. As
the above chart shows, European investors have been
Source: BBC
Kepler Trust Intelligence is written and published by the investment companies team at Kepler Partners.
Visit www.trustintelligence.co.uk for new investment ideas and detailed thematic research every week. 3This 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.
increasing their exposure to the US and Asia more than may be forgiven for their aversion to their domestic
other major regions, including their own. The siren call markets. But as can be seen from the above chart, this
of faster-growing US companies and more dynamic divergence in long-term performance is the widest it has
Asian equities is attractive, and reflects the global been for some readers’ lifetimes. While this divergence is
rotation from value into growth (given the difference in partially reflective of the two regions differing economic
valuations between Europe and the US) as well as Asia’s fundamentals, with past debt crises and lack of growth
better handling of the pandemic. Does Europe’s trend in having dragged on Europe over the last decade, it is also
investment reflect the superior long-term prospects of the reflective of the underlying companies. Europe has lagged
US and Asia, or is it instead an indicator of the recent fear? the US in the emergence of global tech players, and though
If it is indeed driven by short-term returns and fear, there the region does have a few market leaders like ASML and
could in fact be pent-up demand for European equities, Spotify, it is fair to say that European companies fail to
with investors coming home to roost at the first sign of hold a candle to the market dominance and growth of
improving conditions. the US tech giants over the last decade. The question
investors need to ask themselves today is whether there is
Fig.6: Net Asset Growth Of European-Domiciled the potential for this trend to continue: can US companies
Funds, By Sector justify their higher price multiples and continue to push
their markets to new highs, or will Europe close the gap in
Growth in Net Assets of European domiciled funds
a post-COVID-19 rotation into value and cyclicals?
01/2019 - 11/2020
30%
Fig.7: Rolling Ten-Year Relative Returns: US
Versus European Equity Markets
20%
10%
Positive values indicate US outperforms, negative values
0%
%
indicate Europe outperforms.
-10%
Rolling 10 year relative returns: US vs Europe
-20%
1980 - 2020
300
-30%
Jan '19 May '19 Sep '19 Jan '20 May '20 Sep '20
200
Japan Equity UK Equity US Equity
European Equity Asia Equity (inc. China)
100
Source: Morningstar, as at 30/11/2020 0
%
The possibility for a rotation into European equities, or -100
even simply a growth-to-value rotation, translates into an -200
appealing case for European trusts at the widest discounts
(which have the possibility to further enhance returns -300
1990 2000 2010 2020
through a narrowing discount). Such a trust is JPMorgan
Difference
European Smaller Companies Trust (JESC), which trades
at an 11.7% discount, the largest of any European trust Source: Morningstar, as at 31/12/2020
(Source: JPMorgan Cazenove, as at 28/01/2021). This The US equity market reflects the S&P 500, while Europe reflects
discount is arguably unwarranted, given the long-term the MSCI Europe; both are reported in USD.
outperformance of the strategy as well as its disciplined
yet adaptive approach to investing. The managers Riding the green wave
(Francesco Conte and Edward Greaves) have recently
been taking advantage of this flexibility to rotate out of The increased demand for European companies may
defensive companies and into the more cyclical names, not solely be the result of improving economic fortunes,
consciously positioning the trust for a post-COVID-19 but also due to a change in investor preferences. The
recovery. We therefore foresee a potential duo of tailwinds increasing demand for ESG and sustainable investing is
supporting a narrowing of this discount. well documented, as we discussed in a recent strategy
note, with there being an increasing number of dedicated
sustainable strategies or ESG-compliant investment
Mean reversion, or return processes. While these funds aim to cover multiple regions
aversion? and asset classes so as to appeal to a range of risk/return
profiles, the actual variety of sustainable companies is
Given the recent divergence of performance between much smaller. As can be seen in the above pie chart, the
European and American bourses, European investors most sustainable equity strategies (in absolute terms,
not relative) are either located in the Global sector or
Kepler Trust Intelligence is written and published by the investment companies team at Kepler Partners.
Visit www.trustintelligence.co.uk for new investment ideas and detailed thematic research every week. 4This 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.
in Europe. It is hard to foresee an environment where
corporate cultures and business practices are able to
evolve fast enough to keep up with investors’ demand
for sustainability. We believe that this inflexibility will
ultimately be a tailwind for European equities, as ESG-
conscious investors are increasingly funnelled into
European equities, if for no other reason but for lack of
choice.
Fig.8: Sector Breakdown Of The Most
Sustainable Funds
The most sustainable trusts by sector
Europe
Europe Equity Mid/Small Cap
US
U S Equity Large Cap Blend
Financials
F inancials Sector Equity
Global
G lobal Equity Large Cap
Global Equity Mid/Small Cap
Global
Equity Miscellaneous
Equity
Latin America Equity
Latin
Europe
Europe Equity Large Cap Technology
T echnology Sector Equity
C onsumer Goods &
Consumer
Services Sector Equity
Source: Morningstar, as at 27/01/2021
This data reflects the total number of open-ended equity strategies (excluding REITs) with
a Morningstar sustainability score lower than 20.
As demand for sustainability outstrips supply, we expect
this trend to benefit strategies like Henderson EuroTrust
(HNE), which is amongst the most sustainable trusts in
the AIC Europe sector. What is interesting about HNE is
that its investment process does not require dedicated
ESG integration, for the manager (Jamie Ross) makes a
conscious effort to generate alpha through the positive
impact good governance and sustainability have on his
investments’ revenues. Therefore we view HNE as a perfect
example of the inherent sustainability of the broader
European equity sector. A good sustainability rating does
not come at the cost of returns for HNE, as it has a strong
track record of outperformance versus its benchmark.
Kepler Trust Intelligence is written and published by the investment companies team at Kepler Partners.
Visit www.trustintelligence.co.uk for new investment ideas and detailed thematic research every week. 5This 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.
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Kepler Trust Intelligence is written and published by the investment companies team at Kepler Partners.
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