Market overview
- Global equities sold off sharply from the start of 2016 through mid-February, driven by rising fears of a US recession, ongoing concerns about global economic slowing and low commodity prices.
- However, global equities rallied sharply during the second half of the quarter as investor anxieties proved to be misplaced.
Performance highlights
- Invesco European Growth Fund (Trades, Portfolio) Class A shares at net asset value (NAV) declined in the first quarter, but relative results were favorable with the fund outperforming its benchmark index. (Please see the investment results table on page 2 for fund and index performance.)
- Stock selection in the financials, consumer discretionary and industrials sectors were key drivers of relative outperformance.
Contributors to performance
- Fund holdings in the financials, consumer discretionary and industrials sectors outperformed the respective benchmark sectors and were among the largest contributors to relative performance. An underweight in the weak financial sector added to relative return as well.
- From a geographic perspective, favorable stock selection in Italy, Turkey, Switzerland and the UK added to relative results.
- Haci Omer Sabanci Holding AS (IST:SAHOL, Financial), a Turkish holding company, was the fund’s top individual contributor for the quarter. The stock recovered sharply in the first quarter as economic, commodity and political concerns proved to be overly negative and sentiment toward Turkey and emerging markets in general improved. We continue to believe Sabanci’s strategic assets are highly attractive, with the stock trading at a deep discount to NAV and having a healthy balance sheet.
Detractors from performance
- Fund holdings in the consumer staples and energy sectors lagged those of the benchmark and were the largest detractors from absolute and relative results. A meaningful underweight in the consumer staples sector hampered relative results as well.
- From a geographic perspective, fund holdings in Norway, the Netherlands and Germany declined during the quarter, detracting from absolute and relative results.
- British broadcaster Sky PLC (LSE:SKY, Financial) was the fund’s largest individual detractor during the quarter. Despite recent declines, we believe Sky’s management continues to execute well. The company’s results for the first half of fiscal 2016 were strong, growth continued to accelerate in the UK and there are clear improvements in the company’s new markets, including Germany and Italy. We believe the valuation of this high quality business remains attractive.
Positioning and outlook
- We sold several stocks during the quarter, including Switzerland-based watch manufacturer The Swatch Group AG (XSWX:UHRN, Financial) (0.03% of total net assets) and UK-based insurance company Amlin PLC (LSE:AML, Financial) (0.00% of total net assets). There were no new additions to the portfolio during the quarter.
- Despite the latest sharp rally in global equities, the general outlook for 2016 appears somewhat mixed. In Europe, continued economic weakness has prompted the European Central Bank to expand its Quantitative Easing asset purchases, which will run until March 2017 or beyond if necessary.
- Overall, developed markets (including Europe) appear relatively fully valued, with investors still anticipating favorable earnings growth in the year ahead, despite heightened macro risks.
- Market volatility may remain elevated due to a broad range of macro-economic uncertainties (in both emerging and developed markets) and this could provide attractive buying opportunities for long-term investors.
- Regardless of the macroeconomic environment, we remain focused on applying our well-established, long-term, bottom-up EQV (Earnings, Quality, Valuation) investment process that seeks to identify attractively valued, high quality growth companies.
