Skip to the content

Fund managers show confusion over Europe as macro worries persist

20 November 2014

Asset allocators are still overweight European equities but are considering switching to an underweight in the coming months as concerns mount over the health of the economy.

By Gary Jackson,

News Editor, FE Trustnet

Research from Bank of America Merrill Lynch (BofA ML) has suggested fund managers are unsure about the prospects for European equities as fears continue that the region is on the brink of another recession and a deflationary spiral.

BofA ML’s Fund Manager Survey for November concluded that “investors appear unsure how to treat European equities” after polling 166 global asset allocators with total assets under management of $431bn (£274.8bn) about their current and future positioning.

ALT_TAG Fund managers with global mandates lifted their “moderate” overweight to European equities at the start of November with a net 8 per cent now overweight the region. However, investors also reported that they want to go underweight Europe over the coming 12 months.

Meanwhile, the firm’s separate survey of fund managers who focus on the region found a net 62 per cent forecast improving earnings per share from European businesses for the coming year, up from 32 per cent one month earlier. But despite this European fund managers lifted their cash weightings at the start of November, suggesting increased caution.

Performance of indices over 3yrs

ALT_TAG

Source: FE Analytics

Manish Kabra, European equity and quantitative strategist at BofA ML, said: “European stocks were recently boosted by the best earnings season in three years. However concerns over longevity of growth and deflation continue. Three wise themes of yield, quality, and large cap are the best places to hide in European stocks.”

The macro outlook for Europe has created a darkening cloud over markets in recent months. The latest data from statistical office Eurostat shows inflation across the eurozone stands at just 0.4 per cent while the currency bloc’s economy grew by 0.2 per cent during the third quarter.

While these headwinds have turned many investors off the eurozone, Kerry Craig, a global market strategist at JP Morgan Asset Management, argues that there are a number of reasons to believe “the picture might be a little brighter than is being depicted”.

These include the fact that there is now less austerity among eurozone members than there was in the immediate aftermath of the debt crisis, the “slow but steady” reform to make economies more efficient and competitive, a turn in the credit cycle and stimulative action from the European Central Bank (ECB).

Craig argues that these positive factors are not fully reflected in Europe’s stock markets.

“European equity markets are not expensive at the index level. The MSCI Europe ex UK Index was trading at 14 times price-to-forward earnings at the end of October and just above the average for the last 15 years of 13.9 times,” he said.

“Investors should remember that equity markets are forward-looking and will react to the prospect of better future growth, rather than waiting for it to appear. The outlook for eurozone growth and inflation may not be a chartbuster, but markets might just have a few reasons to change the tune.”

Not all experts are convinced that Europe is markedly cheaper than the US, which is trading at close to record highs.


Macroeconomic forecasting consultancy Capital Economics suggests that focusing too much on metrics such as the cyclically-adjusted price/earnings ratios (CAPE) of the two markets could give a false signal about how cheap Europe really is.

The gap between the non-financial sectors of the US and eurozone stock markets’ CAPE has risen from zero in May 2008 to more than 11 today, which is its highest since the dot com bubble burst at the start of the century.

John Higgins, chief markets economist at Capital Economics, said: “We would be wary of interpreting this as a sign that the equities in the eurozone are much more attractively valued than those in the US.”

“The CAPE is only really useful as a guide to value if its denominator reflects a ‘normal' level of earnings. Inflation-adjusted EPS [earnings per share] over the past decade – the denominator – is nearly 30 per cent lower than 12m trailing EPS in the US, but 20 per cent higher in the eurozone.”

“It could be that EPS is poised to fall sharply in the US, but rise in the eurozone. But given the outlook for the US and eurozone economies, we doubt it. And with this in mind, we are not convinced that the stock market will fare much better in the eurozone than in the US just because of the gap between their CAPEs.”

For investors who do believe Europe remains a pocket of value, there are a number of highly regarded fund managers focusing on the area.

Alister Hibbert’s £1.6bn BlackRock European Dynamic fund is found in the FE AFI Cautious, Balanced and Aggressive indices. Hibbert is also an FE Alpha Manager while the fund has won four FE Crowns and is on the FE Research Select 100 list of preferred funds.

Since the manager took over in March 2008 the fund has returned 105.48 per cent and has significantly outperformed the IMA Europe Excluding UK sector average and FTSE World Europe ex UK benchmark in the process. It’s also done that with less volatility and maximum drawdown than the market.

Performance of fund vs sector and index over manager tenure

ALT_TAG

Source: FE Analytics

The FE Research team said: “The team is well aware of how the situation in Europe can harm the portfolio even if the long-term reasons for investing in the underlying companies still hold true. This is why it prefers businesses that derive a significant proportion of their earnings from outside Europe.

“This careful stock selection is probably why investors have kept their money in the fund despite the crisis that has hit Europe.”

BlackRock European Dynamic is also found in Square Mile’s Academy of Funds, where is holds the top ‘AAA’ rating. The only other member of the sector rated at ‘AAA’ is Alexander Darwall's £2.5bn Jupiter European fund.


Darwall (pictured on page 1) is also an FE Manager and his fund holds five FE Crowns, while appearing on the Select 100 list. It also appears in the FE AFI Aggressive and Balanced portfolios, but not the Cautious.

Since the manager took control of the fund in January 2001 it has outperformed both the sector and the index by a wide margin with a 223.22 per cent gain. Again, this has been achieved with lower maximum drawdown and volatility than the average European fund and the index.

Performance of fund vs sector and index over manager tenure

ALT_TAG

Source: FE Analytics

Square Mile said: “The manager identifies companies with structural growth, high barriers to entry and good management. Such companies tend to be market leaders and can often operate within niche global industries.”

BlackRock European Dynamic has a clean ongoing charges figure of 0.93 per cent, while Jupiter European charges 1.03 per cent.

ALT_TAG

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.