Europe has staged a surprising turnaround in recent months, as fears of a deep recession in the region have given way to optimism that it may in fact avoid a recession in 2023. The European Union’s economic commissioner Paolo Gentiloni said the region may experience a ‘more limited, shallow contraction’, although he remains ‘vigilant’.

The region has been helped by peaking inflation, a strong labour market, a resilient business environment, and reduced reliance on Russian energy, which has brought prices down significantly.

Wrong perception

JPMorgan European Growth & Income (JEGI ) has been a direct beneficiary of these trends. Zenah Shuhaiber, one of three managers of the £419m investment trust, said despite an optimistic outlook, European stock markets still struggled with a poor reputation among investors.

‘The perception is of low-growth and low-quality businesses that do not quite make it,’ she said. ‘But actually [European markets] have some of the world’s leading companies, whether that’s in pharma, semiconductors, energy, or luxury goods.’

The downbeat sentiment towards Europe has been a long-running theme, and Shuhaiber noted that since 2015, €450m has been pulled out of European-focused funds, making it ‘under-owned’ by investors.

On the upside, Shuhaiber said, ‘it is hard to see the perception getting any worse’, and ‘we feel like [Europe] has bottomed out a little’.

‘The market valuation is at a 30% discount to the US and we have not seen that in decades,’ she said. ‘Looking at buybacks that occurred in Europe versus the US, Europe exceeded the US, which is a sign that companies are seeing their shares as being quite cheap.’

Shuhaiber and co-manager Tim Lewis moved onto the trust in 2020 to work with Alexander Fitzalan Howard who had managed the predecessor growth portfolio since 2006.

She said the team had taken advantage of cheap stock prices to reposition the portfolio to be more ‘balanced’ between cyclical and defensive stocks, having benefited from a defensive positioning last year.

Top performer

Latest figures from Numis Securities show the closed-end fund increased its net asset value (NAV) by 21.3% over the past six months, beating the 18.4% return from its MSCI Europe ex UK benchmark.

Over three years, the NAV has grown 60.1%, outpacing the 39.2% return from the index.

That growth has underpinned shareholder returns that have put the trust at the top of its seven-strong AIC Europe sector. Over 12 months, shareholders have enjoyed a 31.3% return, rising to 67.8% over 36 months.

It is not the only shake-up the fund has witnessed over the past year, with a full restructuring of what used to be two separate share classes – one offering growth and one offering income – into one growth and income portfolio.

The old structure allowed investors to switch between growth and income for free but Shuhaiber said ‘no one understood the story of the trust as a whole’ and ‘we barely had anyone take advantage of switching’.

She maintained that the 4% dividend target the trust now has makes it attractive from both a growth and income perspective.

The core investment process has remained the same despite the restructure and Shuhaiber said the team’s stock picking focuses on four questions: Is it a good business? Is it attractively valued? Is there momentum in earnings upgrades and the share price? And is the business sustainable from an ESG perspective?

Renewables theme

Sectors that have been answering these questions for Shuhaiber and the JEGI teams include energy and renewables. She said Europe has remained ahead of the curve in terms of renewable technology, although it is not often given the credit for it.

The Inflation Reduction Act brought in by US president Joe Biden has been hailed as a milestone for the energy transition, as part of the plan to curb inflation by reducing the deficit rests on increasing investment into energy production and the promotion of clean energy.

However, Shuhaiber said this has ‘been a theme’ in the EU for a while.

‘If you look at European companies and European research in this area it is world-leading, and the rest of the world will have to play catch-up,’ she said.

The energy transition in Europe has been further enhanced by the Russian invasion of Ukraine which last year provoked sharp rises in natural gas and oil prices in Europe, which is heavily reliant on Russian energy imports.

‘The war means people are not just talking about renewable energy anymore, countries have to get their act together because now, it’s an issue of energy security,’ she said.

Companies benefiting from this include JEGI holding Schneider Electric, which specialises in digital automation and energy management.

‘It has lots of management systems to help companies monitor energy efficiency,’ said Shuhaiber. ‘There has been a big focus on the company and there are a lot of people buying a lot more of its products to help them understand their carbon emissions.’

The team also invests in electricity generation group RWE, which is the world’s number two in offshore wind power and Europe’s third-largest renewable energy company, as well as Prysmian, which ‘creates cables for electricity distribution’.

‘There is more focus on renewable energy… there are only so many places you can get oil and gas from whereas renewable energy can be internalised and become a cost-efficient option,’ said Shuhaiber.

‘A lot of the energy transition will happen from the bottom up rather than from top-down government policy.’