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BlackRock Greater Europe Investment Trust: Europe – The road to recovery

In Europe, the pandemic has paved the way for a brave new era of co-operation, says Stefan Gries, Co-Manager of the BlackRock Greater Europe Investment Trust plc.

To discover more about the BlackRock Greater Europe Investment Trust click here. 

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.

Europe has weathered a number of crises over the past decade, but – after a shaky start – the COVID-19 outbreak appears to have ushered in a new spirit of teamwork among EU member states. This should strengthen the region’s foundations and support its economic recovery. It may also prove important for investors. 

Over the past decade, economic stimulus in Europe has focused largely on monetary policy, with almost no fiscal coordination between European Union member states. It is notable that the European Central Bank (ECB) was one of the few central banks not to cut interest rates in response to the pandemic. It was, perhaps, an admission that with rates already negative, further rate cuts may cause more harm than good.

European policymakers have made a welcome shift to fiscal policy as a means to stimulate under-pressure economies. The ambitious €750bn EU recovery fund is an important step towards rebuilding the damaged political relationships between the EU members and providing an economic foundation for recovery1.

Unprecedented stimulus

That European governments have agreed the package is a major achievement in itself. Not only is the response far larger than anything seen before, Germany and France in particular, have shown themselves willing to share in the risk of the hard-hit Southern states, such as Italy and Spain. It is a gesture of solidarity that marks a new era of cooperation for the EU.

This fund comprises €390bn of grants and €360bn of loans. This creates net transfers ranging from 3% to 20% of GDP for countries such as Greece, Portugal, Spain and Italy funded by the issuance of common EU bonds. It should lower the cost of borrowing for Southern states at a time when they most need it and reduce the risk of any break-up of the bloc. Lower borrowing costs should have a direct impact on equity valuations, lowering the overall risk premium for European shares.

The nature of the support measures is also vitally important. Sovereign spending is focused in the right areas and has been designed to stimulate consumer spending and investment, creating a greater multiplier effect. For the first time we’re seeing a move towards giving grants. The expectations attached to these grants could make Europe an investment destination for global capital, which would have previously gone elsewhere.

Favourable conditions

Most important are the conditions attached to the grants. The grants are based on a set of reforms, including labour and supply side reforms, that should make European economies more competitive and position them well for the future. The European recovery plan has a clear bias towards digital infrastructure and green technologies. Around 30% of the entire package is ear-marked for climate change initiatives and all spending must contribute to EU emissions-cutting goals2. This may benefit a number of companies we own with exposure to renewable energy, cleaner engines or construction, but is also likely to bring new and exciting companies – the type of “giants in their niches” companies we favour – to the fore.

We believe the recovery plan may also encourage companies to boost their environmental, social and governance (ESG) credentials and, if so, that should help long-term performance. In particular, many companies stand to benefit from further investment to help meet regulatory targets for emissions reductions as well as improved digital penetration across industries.

The €750bn coronavirus recovery fund exposed some fault lines in the EU. It faced considerable opposition from the ‘Frugal Four’ (Austria, Sweden, Denmark and the Netherlands) and the ultimate level of grants was reduced from €500bn1. However, in the end, it was a clear sign of solidarity, and future precedent for crisis management has been set. This is important for greater European unity and more effective policy.

This gives rise is a lot of elements coming together. It should support the recovery in growth we are witnessing across Europe as economies re-open.  We believe the BlackRock Greater Europe Investment Trust is in a good position to benefit.

Unless otherwise stated all data is sourced from BlackRock as at July 2020.

1Financial Times, July 2020

2Reuters, July 2020

To be attributed to Stefan Gries

Risk Warnings

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.

Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.

Trust Specific Risks

Exchange rate risk: The return of your investment may increase or decrease as a result of currency fluctuations.

Emerging Europe risk: Emerging market investments are usually associated with higher investment risk than developed market investments. Therefore, the value of these investments may be unpredictable and subject to greater variation.

Liquidity risk: The Trust’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.

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.

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To discover more about the BlackRock Greater Europe Investment Trust click here. 

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