BlackRock on equities: positioning remains low despite steady flows
Since the ECB’s game-changing intervention in the summer of 2012, the marked increase in investor flows towards European equities has been steady and from a near record underweight position to European equities in June there have been sizeable inflows into European equities, which are now being seen as more investable, according to BlackRock’s European equity barometer.
However, the firm noted, positioning remains low relative to historic levels, with few investors overweight.
“These flows initially came from cash and US equities but also more recently from some investors switching out of bonds. The latter is very significant as it is the first time we have seen this for many years. If this continues, and we believe the valuations strongly support this, we are only mid-way through a bull market. If anything, the US fiscal cliff uncertainty is shifting some of the risk from the eurozone towards the US, further highlighting the valuation discount of European equities relative to their US peers,” BlackRock said.
Providing there is no major political slippage in Europe, the firm expects further inflows into the region’s equities into 2013.
Despite the rally in 2012, the market remains attractively valued, both versus its historic average, and against other major developed equity markets.
When looking on a P/E basis, the European market is 5% below its historic long-term average. It is also trading on a 25% discount to the US equity market; this is close to its highest historic discount, which typically stands at 8% on average.
“Finally, when looking against other asset classes, the European equity market also stands at an attractive valuation, offering an earnings yield of c.8% and a dividend yield of 4%. – both significantly more attractive than the lower yields investors currently achieve on cash or on low-risk sovereign bonds. This clearly highlights that risk aversion towards European equities remains high,” BlackRock said.
Assuming that political momentum continues to accelerate, and that marketd avert a bad fiscal cliff outcome in the US, markets are entering 2013 with positive global economic momentum; promising structural reforms in eurozone periphery countries gathering pace and supportive monetary policies across the world.
According to BlackRock, the US is the new focus of investors’ worries.
“Indeed the eurozone is showing more progress in making its deflationary structural adjustment than America. This is because it took the fiscal pain up front to a far greater degree than the US. Consequently, current account imbalances on the periphery are improving. Investors are slowly realising that their underweight position is no longer sensible,” the firm said.
However, the political momentum and therefore the economic momentum, remains fragile. It is important that there is no slippage in political actions, which could change the macro-economic picture rapidly from the one that we are portraying here.
“Despite last year’s rally, we see potential total return for European equities of around 15% in 2013. This assumes 9% EPS growth, 4% dividend and a small element of re-rating,” BlackRock said.