Consumer prices inflation in the eurozone fell to 0.3 per cent in September while the economy failed to expand over the second quarter of the year.
These weak data points have contributed to the falls in equity markets over recent weeks, as investors attempt to weigh up whether the bloc can secure growth.
Last month, the European Central Bank (ECB) slashed interest rates to new record lows and announced stimulus including an asset purchase programme in a bid to kick-start inflation and economic growth, with many commentators expecting the bank to loosen policy further in the months ahead.
However, the bank’s moves so far failed to reassure the market for long with the FTSE Europe falling 7.83 per cent since the start of September.
While the FTSE 100 has fared worse over this time, Europe has underperformed other developed markets.
Performance of indices since 1 Sep 2014
Source: FE Analytics
Amid this backdrop, fund managers have pulled away from European equities. October’s BofA Merrill Lynch Fund Manager Survey shows a net 4 per cent of asset allocators are now overweight Europe - a fall of 14 percentage points from the previous month’s survey.
BofA Merrill Lynch European equity and quantitative strategist Manish Kabra said: “With the European Central Bank ‘hope trade’ gone, performance in European equities is reverting to fundamentals. As our view remains downbeat, we continue to favor defensive dividend yield stocks and expect any rallies in cyclical stocks to be short lived.”
Some fund managers are viewing the eurozone malaise as a buying opportunity, with Neptune European Opportunities fund manager Rob Burnett (pictured) seeing the recent weakness as a pause in the recovery rather than “a more sinister deterioration”.
“Our bottom line is that this correction is likely a good short and medium-term entry point into European equities. We believe that a number of factors are combining to improve the outlook towards the end of the year and into 2015; just at the time when equities tend to enter their strongest months of the year,” the FE Alpha Manager said.Neptune European Opportunities has a bias toward the Italian and Spanish markets because companies there have a greater exposure to domestic Europe. Burnett has been especially interested in this theme over the past year as this is where he believes the most compelling value can be found.
Conversely, the manager is underweight German equities. He explains that Germany has a high exposure to exports, especially to emerging markets, which are being hit hard by slowing growth in developing countries.
JP Morgan Asset Management says European equities appear to offer “compelling value”, even though its recovery is under intense pressure and the risk of Japanese-style deflation remains high.
The asset management house says signs that Germany’s economy is stalling - Berlin recently slashed its growth outlook for this year and next to just 1.2 per cent - are concerning and bode ill for the eurozone as a whole, given the country is the region’s largest economy.
Meanwhile France seems to be on the brink of an “existential crisis” as its government has a limited ability to revive the economy, thanks to its low popularity and popular resistance to reforms, while its lagging competitiveness holds back growth.
But the group sees more positive signs on the periphery, pointing out that Italy’s ambitious reform programme has made a strong start in returning growth to the country while highlighting Spain’s recent growth and restructured banking sector.
Andrew Goldberg, global market strategist at JP Morgan Asset Management, said: “European equities are cheap on a global basis and considerably more attractive than the US. Relatively attractive valuations combined with an improving earnings outlook and a pickup in dividends suggests, despite macroeconomic risks, there is compelling value.”
However, not all fund managers are convinced Europe presents an attractive opportunity no matter how cheap it seems compared with global equities.
FE Alpha Manager David Coombs (pictured), who runs the Rathbone Multi Asset Portfolios range, has viewed Europe as a “value trap” for the past 18 months, noting that the currency bloc’s structural problems are yet far from being resolved.
Coombs argues that there is a degree of “political denial” about the steps Europe needs to take for it to secure its recovery, suggesting its problems will continue until more progress is made towards fiscal as well as monetary harmonisation.“Until I see that I can’t get excited about Europe. Yes, there will be one-month rallies: everyone will get really excited about how the periphery is massively outperforming and I’ll miss it - as I have a couple of times in the last two years - but I can only look at the fundamental issues and I can’t see anything there that makes me want to invest in Europe plc,” the manager said.
Coombs' three multi-asset funds are underweight Europe, with the manager preferring to take exposure to Germany given the country’s position as the region’s largest economy and chief decision influencer.
Active exposure to the country is gained through the Baring German Growth Trust while he also hold a DAX exchange-traded fund.
Erik Knutzen, chief investment officer for multi-asset at Neuberger Berman, adds that a degree of caution over European is warranted, given concerns such as geo-political risk in Ukraine sitting alongside its growth problems.
“We are cautious regarding markets in the near term as we see a number of risks continuing to haunt the environment in the weeks to come. Inflation and economic growth in Europe remain quite low, and we wonder whether the European Central Bank will do enough to get things moving again,” he said.
“While there is potential for ongoing financial market unease in the near term, we believe that the current volatility may be creating buying opportunities, particularly in the area of US equities and in emerging stock and bond markets.”
“We have a more neutral stance in Europe and Japan where we want to see how policy actions unfold both from central banks and fiscal authorities.”
