Market overview
- Global equity markets started the year well, buoyed by positive economic data and the signing of the Phase One US/China trade deal.
- However, initial optimism was dampened by a ‘black swan’ event: the outbreak of the novel coronavirus that swiftly spread from China to other global regions.
- European equities fell sharply as the spread of the COVID-19 virus accelerated across the western hemisphere.
- As investors fled stocks in search of assets perceived to be ‘safer,’ all sectors of the broad European equity market declined for the quarter, with financials and energy faring the worst.
Positioning and outlook
- As the market selloff intensified during the quarter, we increased our trading activity to take advantage of the broadening opportunity set. We added several new holdings, including Swiss food company Nestle (XSWX:NESN) and German braking systems manufacturer Knorr-Bremse (XTER:KBX, Financial) (2.09% and 1.13% of total net assets, respectively). We also made numerous adjustments to current holdings by adding to stocks we believe have better long-term risk/reward profiles. We exited several stocks, including French industrials company Vinci (XPAR:DG, Financial) and UK-based consumer goods company Reckitt Benckiser (LSE:RB., Financial)(both 0.00% of total net assets).
- Our team has continued to follow the same long-term, bottom-up Earnings-Quality-Valuation (EQV) investment philosophy/process. Our EQV strategy is long-term oriented; therefore, we believe market corrections can provide attractive opportunities to invest in undervalued businesses. Our focus remains on companies with strong balance sheets, high returns of capital and attractive free cash flow, which we believe could help them withstand a prolonged period of stress.
- Though the coronavirus has been disruptive in the short term (and it is difficult to predict unforeseen risks), we believe companies with EQV characteristics could be well-positioned to outperform over the long term, have the potential to provide favorable downside protection, and may become increasingly attractive to investors in this new environment.
Performance highlights
- Invesco European Growth Fund (Trades, Portfolio) Class A shares at net asset value (NAV) underperformed its benchmark index. (Please see the investment results table on page 2 for fund and index performance.)
Contributors to performance
- Stock selection and an underweight in consumer discretionary added to relative return. Underweight exposure to French luxury goods company LVMH Moet Hennessy Louis Vuitton (XPAR:MC, Financial) was beneficial.
- The fund’s holdings in information technology outperformed those of the benchmark, adding to relative return.
- Geographically, having no exposure to weaker regions within the index, including Belgium and Norway, was beneficial.
- The fund’s cash position added to relative return given the declining equity market.
- Swiss pharmaceuticals company Roche (XSWX:ROG) was the fund’s leading individual contributor. Roche is a high quality company with dominant positions in several therapeutic areas and a leading player in diagnostics technologies. We had the opportunity to initiate a position during the quarter as the stock’s valuation declined relative to its peers.
Detractors from performance
- Stock selection and an underweight in health care was the largest detractor from relative return, with German biotechnology company MorphoSys (MOR) was a key individual detractor.
- An overweight in financials, combined with stock selection, hampered relative results.
- Stock selection and an overweight in the weak energy sector detracted from relative return.
- Geographically, stock selection in the UK and Switzerland detracted from relative return. An overweight in the UK and an underweight in Switzerland were a drag as well.
- Russia-based Sberbank (MIC:SBERP) was the leading individual detractor. The bank has been indirectly affected by the Saudi Arabia/Russia oil price war through the resulting weakness in the Russian ruble. However, the company has had a significant positive effect over longer time horizons and we believe Sberbank’s fundamentals remain very attractive, which is why it is a leading position in the portfolio.
Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com/fundprospectus.
This does not constitute a recommendation of any investment strategy or product for a particular investor.
Investors should consult a financial professional before making any investment decisions.
Note: Not all products available at all firms. Advisors, please contact your home office.
The opinions expressed are those of the fund’s portfolio management, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. Holdings are subject to change and are not buy/sell recommendations.
All data provided by Invesco unless otherwise noted.
