- European markets rally despite expectations of monetary easing being pared back
- The Fund’s banks were strong, benefitting from a revival of the “higher-for-longer” interest rates theme
- Constructive outlook underpinned by reasonable valuations and falling corporate mal-investment
The Fund’s A5 share class returned 3.8%* in the period from Fund launch (27 February 2024) through to 31 December 2024. This Fund’s target benchmark, the MSCI Europe Index, returned 4.5%.
Market Review
European markets rallied over the year despite expectations of monetary easing being pared back. Markets started 2024 expecting between six and seven quarter-point cuts from the European Central Bank (ECB) in 2024, but only four were delivered (taking the refinancing rate to 3.15%). The ECB maintained its messaging that future rate changes will be heavily data dependent.
Positive sentiment seemed to stem from an increased confidence among investors that central banks’ policy tightening efforts have successfully walked the fine line between bringing down inflation and allowing the economy to maintain some momentum. While inflation is slowly coming down towards target, economic growth is proving more resilient than expected.
Towards the end of the year, turbulence for European markets, as the US election victory for Donald Trump led to concern that ‘trade war’ policies could be revived with damaging consequences for the European economy.
Finance (+23%) was the strongest sector in the MSCI Europe over the period, followed by other sectors typically viewed as possessing value style characteristics: communications services (+13%) and utilities (+12%). More cyclical areas such as consumer discretionary (-5.7%) and IT (-4.2%) lost ground.
Analysis of Portfolio Return
With finance sector stocks leading the European market over the period, the Fund’s banks were an area of significant strength, benefitting from the revival of the “higher-for-longer” interest rates theme that dominated for periods of 2023. Banks typically earn larger net interest margins when benchmark rates are higher.
Deutsche Bank, CaixaBank, UniCredit and Banco Santander were all among the Fund’s top 10 contributors during the period, as strong growth in net interest income was reported and full-year guidance raised.
However, the Fund’s portfolio was constructed with modest positive exposure to both growth and value styles on the whole, and this balanced style profile led to stock-picking being the primary driver of returns over the period. The top performing portfolio position was private equity investment company 3i Group. Interim results showed a total investment return of 10% in the six months to 30 September, ahead of analyst forecasts. The gain came from the revaluation of its private equity holdings, the largest of which is Action, the Dutch discount retailer. 3i commented that while Action continues to deliver good sales growth, it has also seen resilient trading against a mixed macroeconomic backdrop from the majority of its private equity holdings.
Industria de Diseño Textil (Inditex), the Spanish multinational clothing company, also rose after posting 10% net profit growth for the first half of the year, despite slower sales growth. After reporting a 1.5% increase in revenue per available room for Q3, shares in InterContinental Hotels Group were also among the gainers.
Novo Nordisk was the portfolio’s largest detractor over the period. Having performed strongly in the first half of the year, sentiment shifted as the latest clinical trial data disappointed against investor expectations which have been elevated by the company’s huge success in recent years with blockbuster weight loss drugs.
A clinical trial for its experimental obesity drug, CagriSema, showed it helped patients lose an average of 22.7% of their body weight in a late-stage study, falling short of the trial's 25% goal.
While still demonstrating meaningful weight loss, Novo Nordisk attributed the lower-than-expected efficacy to the protocol (as patients have a choice of staying on the lower dose to have fewer side effects or taking the higher dose which shows greater efficacy but with the risk of greater side effects). Following these results, the company intends to initiate another Phase 3 trial with a different protocol to optimise weight loss.
Shares in German automobile manufacturer BMW fell after it reduced guidance for the 2024 financial year. The company cut its operating profit margin for 2024 to a range of 6% to 7% (previously: 8% to 10%), attributing the reduction to headwinds in its Automotive Segment resulting from delivery stops and technical actions linked to the Integrated Braking System (IBS).
Tenaris, the manufacturer and supplier of steel pipes for the energy industry, slid after margins for the second quarter were affected by an ongoing decline in OCTG (durable and robust steel) prices in the Americas, while net income was negatively impacted by a $171 million extraordinary provision.
Outlook
We remain constructive on European equities, albeit this view is now tempered somewhat by a weaker technical trend. However, market valuation remains reasonable to moderately cheap and corporate mal-investment has again fallen further.
Our style preference remains in favour of momentum. Our momentum efficacy indicator continues to suggest strong returns from momentum both in Europe and the US. We continue to maintain balance in the portfolio, emphasising quality growth and recovering value stocks with positive momentum characteristics.
KEY RISKS
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.
- Overseas investments may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of the Fund.
- This Fund may have a concentrated portfolio, i.e. hold a limited number of investments (35 or fewer) or have significant sector or factor exposures. If one of these investments or sectors / factors fall in value this can have a greater impact on The Fund's value than if it held a larger number of investments across a more diversified portfolio.
- The fund’s investment objective is to target capital growth for investors. Growth stocks tend to pay out lower levels of dividend resulting in lower income yields and may produce more volatile returns than the market as a whole.
- Outside of normal conditions, the Fund may hold higher levels of cash which may be deposited with several credit counterparties (e.g. international banks). A credit risk arises should one or more of these counterparties be unable to return the deposited cash.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
DISCLAIMER
This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.
It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.
This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.co.uk or direct from Liontrust. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
