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Giants in niches

Is it possible to find certainty in an uncertain world? Perhaps not, but when companies have few competitors and a premium product, it does make them an attractive investment proposition, says co-portfolio manager Stefan Gries

Capital at risk: All financial investments involve an element of risk. Therefore, the value of your investment and any income from it will vary and your initial investment amount cannot be guaranteed.

With Europe’s growth slowing (FT, August 2018)[1], combined with a degree of political uncertainty, there’s a lot to be said for looking at companies whose earnings and cash-flow trajectory is largely independent of what happens in the region.

Often these take the form of specialist companies, dominant within one particular sub-industry. As ‘giants in niches’, these businesses frequently operate in markets where a relatively low number of companies control a rather large market share and have a greater degree of pricing power.

One of these unique categories is Cognac. The spirit, named after the region in France, has seen dramatic demand growth in recent years. Consumer preferences are undergoing a generational shift from white to brown spirits[2] (Euromonitor International, May 2018), with Cognac benefiting from a resurgence in demand for high-end liquor.

What makes Cognac producers particularly attractive from an investment standpoint is the limited competition within the market. The spirit can only be produced in the Cognac region. As a result, there is limited room for supply growth and three companies produce more than 75% of global volumes (Exane BNP Paribas, June 2018), resulting in strong pricing power.

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.? Morningstar Investment Trust European

Annual Performance to Last Quarter End (%) (GBP)	30/06/2017 - 30/06/2018	30/06/2016 - 30/06/2017	30/06/2015 - 30/06/2016	30/06/2014 - 30/06/2015	30/06/2013 - 30/06/2014
Net Asset Value: BlackRock Greater Europe Investment Trust plc	12.36	22.43	9.40	3.34	11.37
Benchmark?	2.52	29.05	6.05	1.12	16.38

? Morningstar Investment Trust European
? FTSE World Europe Ex UK TR GBP

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.

Long-term demand

[1] https://www.ft.com/content/d9b267fc-8f18-11e8-bb8f-a6a2f7bca546

[1] https://www.just-drinks.com/analysis/the-march-towards-premium-brown-spirits-research-in-focus_id125783.aspx

Against the backdrop of greater uncertainty, we also aim to find businesses that tap into end markets that allow for long-term demand for their products.

For example, we feel there are strong investment candidates within the medical technology space. For example, as traditional pharmaceutical companies look to focus more on core activities and seek cost efficiencies, we see a strong trend towards the outsourcing of drug manufacturing (BofA Merrill Lynch research, 2018).

Although this is a fragmented market overall, certain companies have expertise within specific areas, particularly within complex drugs such as the biologics, which helps to try to ensure impressive organic sales growth, good visibility and attractive returns.

Another area supported by long-term structural growth drivers is the semiconductor industry. ‘Shrink’, the process by which semiconductors are scaled with a more advanced circuit, supports innovation, while the falling cost of the output chips associated with this supports long-term demand.

The world has developed a seemingly insatiable need to transfer, store and analyse data, propelling the demand for semiconductors. Semiconductor companies within Europe are exposed to diverse and growing end markets across factory automation, smartphones, personal computing and autonomous driving, to name just a few. These companies operate in a highly profitable value chain with strong incentives to drive innovation.

Given the high level of capital required to innovate and build within this industry, the barriers to entry are exceptionally high. This has created a near monopoly for one firm, allowing it to become the only supplier of Extreme Ultraviolet Lithography technology (a next-generation tool to create microchips) in the world. This gives the company an exceptional level of confidence on orders as well as strong pricing power.

These examples highlight that it is certainly possible to find attractive businesses in Europe offering multi-year growth in earnings and cashflows. What is clear to our minds is the need for a highly selective approach, using fundamental stock picking to source business with the opportunity for positive share price development.

There is no guarantee that any forecasts made will come to pass.

For more information on this Trust and how to access the opportunities presented by European markets, please visit www.blackrock.com/uk/brge

Trust specific risks

Overseas investment will be affected by movements in currency exchange rates. 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.

The Trust’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Trust may not be able to realise the investment at the latest market price or at a price considered fair. 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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