European fund managers have moved to their most bullish stance on technology since 2007, with utilities and basic resources stocks falling out of favour, according to the latest BofA Merrill Lynch Fund Manager Survey.
The European edition of the fund manager survey, which polled the views of specialists in the region, revealed that the UK remains the least popular country for European investors, while sentiment in Italy also fell significantly in June.
However, sentiment towards other eurozone markets has improved, with France emerging as the most overweighted country by European investors closely followed by Germany.
The bank reported that, globally, risk appetite had moderated with low equity valuations and cash weightings elevated and consensus expectations for global growth and profits now moderating.
The survey highlighted the consensus that equities remain expensive with 44 per cent of global fund manager respondents claiming global equities are overvalued, the highest since the survey began in 1998. However, just 18 per cent believe European equities are overvalued.
Among European managers there has been some turnaround in views on valuations, with European equities now seen as overvalued by 11 per cent of fund managers, significantly higher than last month.
The most popular sector among European fund managers is technology, with 39 per cent overweight to the sector – the highest since 2007. The sector is also the largest overweight for global managers and has performed strongly since the start of the year, despite dropping off more recently.
European sector sentiment and price relative
Source: Bank of America Merrill Lynch
According to the survey, insurance and banks remain favoured overweight positions as industrials and construction stocks have also seen an uptick in popularity.
Utilities was the least popular sector among European fund managers. Indeed, when tallying all underweight positions of the surveyed managers relative to the benchmark, the sector had a net underweight of 39 per cent.
The survey said that this was “close to triggering the contrarian buy signal - although the sector was more unpopular in February/March of this year”.
However, the biggest downward one-month move was in basic materials, which fell to a 33 per cent net underweight. The survey noted that fund managers notably cut underweights in the food & beverage and personal & household goods sectors.
European fund managers also revealed less bullish views on the European economy, with 61 per cent of managers in the region expecting the European economy to strengthen during the next 12 months, down from 73 per cent in May. However, less than 10 per cent of European fund managers expect a recession in the region.
The prospect of higher inflation over the next 12 months has also fallen to 61 per cent from 73 per cent over the same period, mirroring expectations for the economy.
Source: Bank of America Merrill Lynch
The biggest driver of economic growth in the eurozone during the next 12 months is expected to be global reacceleration although the outlook for consumer spending has also improved somewhat.
On a stock level, fund managers have also become less bullish: 64 per cent expect higher earnings per share (EPS) growth over the next 12 months down from 76 per cent in May. A quarter of managers anticipate earnings per share growth of at least 10 per cent, yet, another 25 per cent of respondents believe expectations are too high.
“Evidence of 10 per cent plus EPS growth and agreement on a structural reform agenda in major eurozone countries are seen as the most positive signals for European risk appetite, according to 42 per cent and 36 per cent of European fund managers respectively,” it noted.
Despite several political headwinds at the start of the year, over six months European funds have been among some of the industry’s best performers.
The average IA European Smaller Companies fund is up by 23.75 per cent, the best performing fund sector over that time frame.
It is closely followed by the Europe ex UK sector, where the average fund has risen by 19.94 per cent. The smaller IA Europe including UK sector has also performed well rising by 17.15 per cent.
The best performing fund from the European sectors over six months is the £125.6m, three crown-rated Henderson European Smaller Companies fund managed by Ollie Beckett and Rory Stokes. Over six months the fund has risen by 32.53 per cent.
Performance of fund vs sector over 6mths
Source: FE Analytics
The fund invests in smaller companies in Europe (excluding the UK), with its largest sector exposure in the industrials sector, representing 31.9 per cent of the portfolio. The fund has a solid track record over a longer time frame, having returned 75.22 per cent over three years and 190.01 over five years. It has an ongoing charge figure (OCF) of 0.86 per cent.
The best performing fund from the larger IA Europe ex UK sector is the five crown-rated Marlborough European Multi Cap fund, managed by David Walton and Will Searle.
The £166.9m fund aims for obtain capital growth through investment in European listed and/or domiciled companies. Over six months the fund has returned 27.8 per cent and it too is a strong performer over longer time periods, returning 87.13 per cent over three years and 188.7 per cent over five years. It has an OCF of 1.05 per cent.