US stocks hit ever increasing all-time highs in 2017, and so far the trend has extended into 2018. However, it isn’t just equities stateside enjoying a bull run. European equities logged impressive returns, with the Stoxx Europe 600 rising by over 7% in 2017. BlackRock’s BGF Euro-Markets fund outperformed the trend in Europe, locking in gains above the Morgan Stanley Capital International (MSCI) European Economic and Monetary Union (EMU) Index and the Euro Stoxx 50 Index.
Matt Williams, a director in the European equity team at BlackRock, says he is expecting positive earnings growth this year, which will drive European equities higher. However, he cautions that the prospects for a big rerating of the market are limited, stressing the importance of stock picking and diversification.
The BFG Euro-Markets fund entered 2017 with 66% of the portfolio risk in stock specifics, a position BlackRock says worked well during the year. The top five contribution positions in the fund are all from different sectors, highlighting the importance of diversification. The investment rationale was as much about exclusion as it was about inclusion.
The fund invested in Finecobank in the financial sector, as the team believed it was a strong example of an innovative disruptor within a differentiated client proposition. In luxury, the fund added Kering to the portfolio in March’ 2017, as a play on the turnaround at Gucci orchestrated by its new management team. The fund sees further upside for Gucci, and in turn, Kering in 2018. As a play on the recovery of the French economy, the fund invested in construction company Eiffage, as it forecasts continued earnings and cash flow growth. ST Microelectronics was one of the fund’s key investments, which it began in February. After many years of poor performance, the company’s management raised revenue guidance in May, as its research and development (R&D) investments began to bear fruit. Finally, a central exclusion in the portfolio was French oil giant Total after ‘years of unsuccessful exploration’.