BlackRock Greater Europe Investment Trust: The European Green deal – when macroeconomics matter

BlackRock

Macroeconomic factors do not normally play a significant role for stock pickers. However, says
Stefan Gries, Co-Portfolio Manager on the BlackRock Greater Europe Investment Trust plc, the
European Green Deal could be an exception, creating real opportunities across European markets.
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
A stock picking approach usually focuses on the qualities of individual companies, rather than the
wider economic environment. However, occasionally, macroeconomic factors combine to create a
uniquely favourable environment for certain sectors and companies, enabling them to deliver long-
term resilient growth. We believe that the European Green Deal is one of these rare swing factors.
The EU has set a clear target to achieve carbon neutrality across the bloc by 2050, including tighter
reduction in emissions by 2030 1 . The Green Deal has been created to facilitate this transition,
mobilising €1 trillion over the next decade to tackle climate change 2 . Given its size and the very
specific areas on which it is focused, we see it creating significant opportunities.

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The ‘green recovery’

The European Commission has four near-term priorities for the green recovery: the roll out of
renewables; the renovation wave; green mobility; and kick-starting the hydrogen economy. For
businesses involved in these fields, the combination of government backing, financial resources and
favourable regulation should create a uniquely fertile environment for growth.

Many of these areas are slow burn. The US has front-loaded many of its stimulus measures, but the
EU has instead chosen to drip-feed capital. This suits our long-term agenda. For example, the
increase in the renovation rate will be staggered – at 1.2% from 2023 – 2025, rising to 2% per year in
2026 – 2029 3 . The renovation targets include tackling energy poverty, improving public buildings,
such as educational, health care and administrative facilities, and decarbonising heating and cooling.
We have found a number of companies likely to be significant beneficiaries, where the potential
growth is not yet appreciated by the market.

On green mobility, an acceleration of electric vehicles is a necessity. This has consequences
throughout the supply chain. For example, electric vehicles use around 5-6x the amount of
semiconductor content. As investors, we need to understand whether we are at the beginning,
middle or end of a sector’s business cycle. To our mind, this appears to be the beginning of a very
long transition.

It should be said that the Green Deal does not automatically make specific companies attractive.
Hydrogen, for example, is an early-stage energy and while it promises to be exciting, it doesn’t yet
have a significant end market. There is no dilution of our usual quality control measures: ensuring
companies have a capable management team, a strong franchise and a sustainable business model.
However, it does ensure that a key criterion – the strength of the end market – is fulfilled.

Build back closer

Europe also benefits more generally from a desire to relocate critical infrastructure and component
manufacturing closer to home. The pandemic ruthlessly exposed the dangers of relying on Asian
supply chains, particularly in areas such as chipmaking. Policymakers have realised that they need to
build up domestic infrastructure and expertise. This can benefit individual companies because it can
deliver policymaker support and draw in expertise.

These trends can also guide us on where not to invest. The decarbonisation of Europe will have its
casualties. For example, it will be a headwind for some automobile groups that will need to invest
billions in the transition to electric cars.

We are also wary on the price we pay. Where there are these significant initiatives, it is important to
maintain discipline, finding not simply the areas that will grow, but where that growth is
underappreciated by the market. That won’t necessarily mean that a company is cheap, but it will
mean that it is undervalued.

Occasionally, there are exceptional external forces that change the outlook for specific sectors and
companies. The European Green Deal is a rare exception to our premise that macroeconomics
doesn’t matter for long-term success. It is likely to deliver some exceptional opportunities.

1 European Commission, January 2020
2 Norton Rose Fulbright, April 2021
3 European Commission, October 2020

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
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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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