Skip to the content

Buying opportunity opening in “cheapest market in the world”, say fund managers

12 December 2014

The latest announcement by the European Central Bank has got investors and fund managers excited but is this the time to buy European equities?

By Daniel Lanyon,

Reporter, FE Trustnet

European equities have been one of the slowest markets to recover from the depths of the financial crisis in March 2009, with any hopes that were built in the first half of 2014 dashed in the second half as the investors lost hope that a firm recovery was underway.

According to FE Analytics, the MSCI Europe ex UK index is up slightly on the year – 1.04 per cent – ahead of the FTSE All Share but a long way behind the surging US market.

Performance of indices in 2014



Source: FE Analytics

However, with an expectation of a full-blown quantitative easing programme building, the market could be set for a shake-up of the stagnant sentiment that has broadly persisted since the 2011 sovereign debt crisis.

The latest take-up of the European Central Bank’s (ECB’s) plan to help finance its beleaguered banks – the Long Term Refinancing Operation (TLTRO) - was watched by investors hoping for a key signal of whether the central bank was poised to act on a QE.

European banks borrowed just €130bn of a possible €317bn in the ECB’s second TLTRO, according to figures published yesterday, which some commentators see as paving the way for full QE if the central bank wants to expand its balance sheet as planned.

Anna Stupnytska, global economist at Fidelity, said: “The initial catalyst for market volatility earlier this week seems to have been the news about earlier elections in Greece. On top of this, the lower-than-expected TLTRO take-up also added to concerns that the ECB is not doing enough to boost lending,” she said.

“While there are some tailwinds that could help growth rebound in 2015, a further drop in inflation – exacerbated by the sharp decline in the oil price – could come before any meaningful growth acceleration.”

“This would likely force the ECB into further action, including large-scale purchases of sovereign bonds now likely to be announced as early as the first quarter of 2015. This would allow the ECB to expand its balance sheet meaningfully, and send a positive signal to markets.”

Rob Burnett (pictured), head of European equities at Neptune and manager of the Neptune European Opportunities fund, says valuations are now very attractive for European stocks.

“Recent months have seen something close to capitulation from US investors in Europe. However, we do see positive catalysts in the months ahead,” he said.

“European equities are deep value on a global and historical basis. On a price to book, price to sales or cyclically adjusted P/E [CAPE] basis, Europe stands apart as the cheapest major market in the world. We believe that European markets are priced for secular stagnation and deflation already, and so any upside in growth ought to be rewarded with higher ratings.”

“We see the ECB as providing ongoing support for asset prices and for the economy and are positioned in companies that benefit from monetary support.”

FE Alpha Manager Steve Cordell, who manages several Schroder funds including the £730m Schroder European Opportunities fund, says the likelihood of QE signals a buying opportunity for European stocks.

“We would highlight the opportunity potentially on offer if the ECB does embark on a full-blown programme of QE, as many think it will," he said.

"Government bond prices are currently high in Europe and yields are correspondingly ultra-low. QE would offer existing bond investors a good opportunity to sell their bonds to the central bank and use the proceeds to invest in the equity market. "

Nick Gartside, manager of the £500m JPM Strategic Bond fund, says the low take-up of TLTRO is an overt signal that the ECB is poised to act and announce its own foray into QE.

“If the ECB is serious about expanding its balance sheet by €1trn, the TLTRO amount is a drop in the ocean. Realistically quantitative easing is the only way to meaningfully expand the balance sheet. From an investment perspective peripheral bonds, particularly Spanish and Italian debt, could well be beneficiaries,” he explained.

Alastair McCaig an analyst at IG, also agrees that the TLTRO auction suggests, regardless of German protestations, that the ECB will implement QE “some time in 2015”.

“As Greek equities continue to sell off, the markets have shown how unsure they are of the country’s political future, and the ambitious move by prime minister Antonis Samaras to call snap elections looks far from certain to succeed,” he said.

However Angus Campbell, an analyst at FXpro, says the central bank may find it harder to expand its balance sheet than some more optimistic investors believe.

“The main issue with this is that the ECB’s balance sheet is more likely to contract when the earlier loans are repaid next year, so without going into the realm of purchasing sovereign debt, returning the ECB’s balance sheet to its 2012 levels is going to be very hard work,” he said.

“If there’s anything that the last few years have taught investors, it is that trying to predict what action the ECB will take is impossible and we can only go with the information and statements they give at their monetary policy meetings.”

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.