European Equity Update Matt Williams, Director, European Equities May 2017
Flow as a % of AUM Yield spread European equities are not popular Positioning Significant outflows from the region... driven by anxiety around political risk 30% 35 French political risk premium 20% 25 10% 15 0% 5-10% -5-20% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 17 Feb 17-15 US UK Eurozone Japan EM But fundamentals are stronger 10-year zero-coupon yield spread: France vs a basket made of 75% Germany, 14% Spain and 11% Italy Source: Bloomberg, JPMorgan, 1 February 2017. Data representation and based on the 25 biggest ETF's with a mandate to invest in a particular region. Source: Kepler Cheuvreux March 2017 2
European political landscape Earnings UK: article 50 triggered in March 17 France: Presidential Election May, 2017 Germany: General Election September, 2017 Political uncertainty to remain in 2017 3
01/2010 05/2010 09/2010 01/2011 05/2011 09/2011 01/2012 05/2012 09/2012 01/2013 05/2013 09/2013 01/2014 05/2014 09/2014 01/2015 05/2015 09/2015 01/20 05/20 09/20 01/2017 Index Index 2017: strong start to the year Macro Global Manufacturing PMIs 60 European Manufacturing PMIs 65 55 60 55 50 50 45 45 40 40 35 2010 2011 2012 2013 2014 2015 20 2017 US China Eurozone Germany France Italy Spain UK Solid economic activity across all regions Source: Thomson Reuters Datastream, BlackRock Investment Institute, March 2017. Note: Purchasing Manager s Indexes (PMI) are economic indicators derived from monthly surveys of private sector companies. A number of 50 indicates an improvement while anything below 50 suggests a decline. 4
Employment (%) Annual Change (%) Labour market and credit growth are healing Macro Year-over Year Changes in Employment 2001 through 20* Eurozone Loans to Private Sector 6 15 4 2 10 0 (2) 5 (4) (6) 0 (8) 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15-5 2004 2006 2008 2010 2012 2014 20 European Union U.S. Private Sector Households Non-Financial Corporates Europe s recovery is on track Source: Empirical Research. European Central Bank, Bureau of Labor Statistics, Empirical Research Partners Analysis.*Data for the European Union through Q3 20. March 2017. Source: Thomson Reuters Datastream, Local Statistics Agencies and BlackRock investment Institute. March 2017. 5
1Q '09 2Q '09 3Q '09 4Q '09 1Q '10 2Q '10 3Q '10 4Q '10 1Q '11 2Q '11 3Q '11 4Q '11 1Q '12 2Q '12 3Q '12 4Q '12 1Q '13 2Q '13 3Q '13 4Q '13 1Q '14 2Q '14 3Q '14 4Q '14 1Q '15 2Q '15 3Q '15 4Q '15 1Q ' 2Q ' 3Q ' 4Q ' European Sales Growth, y/y EBITDA Margin (%) Activity and pricing Earnings Europe Sales growth, % year on year 15% European margins 19% 10% 5% 0% 19% 18% -5% 18% -10% -15% -20% 17% 17% 07 09 11 13 15 17 MSCI Europe EBITDA margin - ex Financials Median will help corporate margins to rebound Source: JPMorgan 31 March 2017. Source: JPMorgan, 31 March 2017. 6
Earnings revisions ratio EPS growth (%) European Earnings are turning positive Earnings Earning revison ratio in Europe Quarterly Eurozone EPS growth since Q1 2012 20 30% 15 10 5 0 20% 10% 0% 8% 1% 1% 12% 18% 13% 8% 9% 4% 4% 1% 12% -5-10 -15-10% -20% -12% -14% -4% -10% -5% -14% -4% -20-25 -30 2003 2005 2007 2009 2011 2013 2015 2017-30% -33% -40% 1Q '12 3Q '12 1Q '13 3Q '13 1Q '14 3Q '14 1Q '15 3Q '15 1Q ' 3Q ' Europe 9-wk avg Euro Stoxx EPS Growth, %yoy Earnings revisions the strongest in 5 years Source: Barclays Research, DataStream, MSCI, IBES. 31 March 2017. Source: JPMorgan, March 2017. 7
02/01/2014 02/02/2014 02/03/2014 02/04/2014 02/05/2014 02/06/2014 02/07/2014 02/08/2014 02/09/2014 02/10/2014 02/11/2014 02/12/2014 02/01/2015 02/02/2015 02/03/2015 02/04/2015 02/05/2015 02/06/2015 02/07/2015 02/08/2015 02/09/2015 02/10/2015 02/11/2015 02/12/2015 02/01/20 02/02/20 02/03/20 02/04/20 02/05/20 02/06/20 02/07/20 02/08/20 02/09/20 02/10/20 02/11/20 02/12/20 02/01/2017 02/02/2017 Euribor What about European Banks? Earnings 3 month Euribor futures (YE17-YE19) 3 2.5 2 1.5 1 0.5 0-0.5-1 Euribor FY17 Euribor FY18 Euribor FY19 The outlook has improved, but rates remain low Source: Bloomberg, BlackRock, March 2017. 8
Price to Earnings Shiller P/E Yield European equities may not be cheap but are not expensive Valuation MSCI Europe: 12 month forward price to earnings Shiller P/E versus US Equities Equity, Sovereign and credit yields 26 45 9 24 40 8 22 20 35 7 6 18 15.2 30 5 25 4 14 12 10 8 6 88 90 92 94 96 98 00 02 04 06 08 10 12 14 N12M PE Median 20 15 10 5 1985 1989 1994 1998 2003 2008 2012 US: Shiller's P/E = 29.8x 3 2 1 0-1 99 01 03 05 07 09 11 13 15 17 MSCI EMU: Dividend Yield Bund 10yr yield Iboxx Euro Corp bond yield Relative valuations supportive Source: Chart 1: Morgan Stanley. 3 April 2017. Chart 2: Source: Credit Suisse- shows valuation discount of Europe versus US using Shiller PE. 31 March 2017. Chart 3: Source: Barclays, March 2017. 9
What investment opportunities are we focusing on? Global cyclicals Global cyclicals US shale capex US shale capex EM consumers EM consumers Reference to the names of each company mentioned in this communications is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies. 10
Market Capitalisation BlackRock European Dynamic Fund: Overview Europe ex UK equities All Cap Style: Flexible Tracking error range: 4.0% - 10.0% Driven by: rigorous process proven stock picking portfolio construction skills Performance objective: 1st quartile versus peer group over 3 and 5 years Investment Region Manager Vehicle (Domicile) Benchmark LARG E European Dynamic Europe ex UK Alister Hibbert BFM (UK) FTSE World Europe ex UK Fund size 2,206m as at 31 March 2017 MID 35-65 shares SMALL Style Flexible Flexible, all-cap, high alpha product Source: BlackRock. Relevant peer group is the IMA Europe ex UK peer group of mutual funds. Target tracking error range: there is no guarantee that this will be achieved. Please refer to Morningstar disclaimer on page. 11
% Return BlackRock European Dynamic Fund: Performance to 31 March 2017 Performance (D Share Class, Net, GBP) 30 25 20 15 10 5 0 YTD 2017 1 yr 3yr p.a. 5yr p.a. BlackRock European Dynamic Fund 7.8 22.6 10.3 15.2 FTSE World Europe ex UK 7.5 27.9 9.6 12.8 Inception date: 28 February 2002. Basis: D share class, fund returns in Sterling, Dealing Bid to Bid prices, net income reinvested, net of expenses. Past performance is not a guide to future performance and should not be the sole factor of consideration when selecting a product. Source: BlackRock. 12
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