Investors need to leave the habit of investing in reaction to potential macro changes behind in 2021 if they want to succeed this year, according to Stefan Gries, manager of BlackRock Greater Europe Investment Trust.
The chopping and changing and knee-jerk reactions to expected changes in fiscal policy and interest rates drove a lot of the markets’ rotations last year, stirring up a lot of volatility. This year investors need to look through the “macro noise” and determine which events will actually impact their portfolios.
For example, in the opening days of 2022 there was a significant rotation out of growth and into value, which was “driven by the – in our view well understood – prospect of rate hikes in the US this year,” Gries said.
European equities were down along with the US market after many interpreted the Federal Reserve’s discussion on cutting back on its bond buying as a sign that the central bank was gearing up to raise interest rates.
The US market is so expansive it plays a dominant role in the fortunes of global equites – when the US sneezes everywhere else gets a cold is a well-worn investment phrase – but Gries said that not every part of its’ fiscal policies will have a domino effect elsewhere.
“We believe it is important for investors to analyse whether a slightly higher US 10-year yield actually has any real impact on earnings and cashflows of assets held in their portfolios. Very often, investors will find that this might not be the case,” he said.
Outside of the US there were a lot of domestic, macroeconomic headwinds facing European investors last year besides Covid, including a cyclical rebound as well as broad-based positive earnings revisions which were hard to ignore.
But Gries said “we believe some of these macro tailwinds are likely to fade out,” in 2022, with the exception of “accommodative fiscal policy”.
Gries said he was “encouraged” by the central banks fiscal policies, which will be particularly supportive for companies involved in the ‘green theme’, such as the energy efficiency of buildings, renewable fuels or companies or adoption of electric vehicles, all of which Gries is investing in.
“The EU wants 30 million electric vehicles by 2030. That looked ambitious a year ago, but today it looks a little tame. Growth is much faster than people expected.
“We focus on opportunities amid the technology companies that supply into the electric car industry – semiconductors, chips and sensors,” he said
The European bloc launched a sizeable €800bn (£669bn) post-pandemic recovery fund – called NextGenerationEU – to help finance its transition to a greener and digital economy and repair the immediate economic and social damage Covid has caused. The aim is to build a European economy which has environmental and social sustainability at is core.
As these dominant, macroeconomic factors lessen this is likely to have two main consequences.
First, would be a greater dispersion between sector and stock outcomes “and, with that comes an increased need for greater selectivity,” Gries said.
The BlackRock Greater Europe Investment Trust made the second-best returns out of all European focused trusts last year (32.2%). This was driven by key stock selection rather than an overt bias to one sector, Gries said, though some of the best performers were in technology and healthcare areas.
Performance of trust vs sector and index in 2021
Source: FE Analytics
Second, would be a continuation or even increase in volatility. In his outlook for the year, Gries said: “Over the next 12 months, the journey from A to B may be more volatile but we believe that quality companies will still create wealth for shareholders.”
The FE fundinfo Alpha Manager said that volatility is not always an inherently bad thing for investors and can be an opportunity to test companies’ ability to deliver reliable income and “whether they lend themselves to high and sustainable growth at attractive returns”.
This is the final part of Trustnet’s series, asking the top-performing fund managers in their sectors over 2021 for their views on the coming year. Previously we have tackled the UK and Japan.