BlackRock Greater Europe (BRGE ) expects a ‘cyclical upturn’ across Europe’s most unloved sectors as falling interest rates improve the economic backdrop and narrow the historic valuation gap with the US. 

The £586m trust’s portfolio managers Stefan Gries and Alexandra Dangoor said that industries, such as construction, life sciences and chemicals, which have suffered from pronounced volume declines for the best part of two years, would bounce back as financial conditions ease. 

Despite a structurally improved market composition and a cyclical recovery, the pair said that valuations in the European market were at a record wide discount relative to the US, a dichotomy that did not make sense.

‘A healthy market operates as a discounting mechanism and the investment community’s myopic focus on near-term problems should soon make way for the medium- to long-term opportunities,’ said Gries (pictured below) and Dangoor. ‘We see 2025 as a recovery year for earnings and beyond that we envisage a multi-year period of healthy profit growth, alongside the potential for this historic valuation gap to the US to narrow.’

Over the year to the end of August, weighty returns from Novo Nordisk and analytics company Relx (REL) kept performance in line with the benchmark. Net asset value increased 16.4% over the year against the FTSE World Europe ex-UK index’s 15.8%, while the shares gained 15.5% higher.

Although semiconductor equipment makers ASML and ASM International were major contributors to performance as they soared during the ‘AI boom’ at the beginning of this year, the managers warned that investors had begun to question the flow of money into AI stocks.

In particular, the pair expressed concern about ‘hardware infrastructure roadmaps’ not keeping up with the pace of development in AI.

‘This is relevant to us because the European market is home to an ecosystem of companies which possess the enabling technologies required in these transformational changes – not just AI adoption, but also the energy transition and global efforts to reorganise supply chains,’ they said.

The recovery in Europe may be expanding outside of AI but not all of the trust’s investments are winners, and Gries and Dangoor axed two positions from the portfolio over the year.

Danish freight and logistics group DSV – which had been held since 2016 – raised ‘red flags’ for the managers. They were unimpressed by the $10bn logistic joint venture with Saudi’s Neom city project, which raised corporate government concerns, while the ‘capital intensity’ of the project could potentially destroy value over time.

Their faith in pharmaceutical equipment supplier Sartorius Stedim also diminished after its revenues dropped 18% in the first nine months of 2023, forcing it to cut full-year numbers as excess client inventories reduced demand.

‘Whilst this appears a forgivable event, we took serious issue with the overpriced acquisition of Polyplus which was closed in the summer of 2023,’ Gries and Dangoor said. ‘Like DSV, we felt this was a material break of our original thesis and decided to redeploy capital into issuers where conviction levels were meaningfully higher.’

The redeployment of cash saw the duo add cosmetics giant L’Oréal to the portfolio, which they said not only continues to innovate within its product range but has used ‘technology and data analytics have enhanced its ability to understand consumer preferences’.

‘Additionally, its continued expansion into emerging markets, particularly in Asia and Latin America, offers substantial growth opportunities, whilst further premiumisation of its product offerings could boost profitability,’ they said.

Over the year, the discount widened from 5% to 6% and has since increased to 8% despite spending £10.3m on share buybacks. The board chose not to implement the semi-annual tender offer this month.

Over five years, shareholder returns of 51% are ahead of the benchmark’s 40%, according to Morningstar data.