Is there ‘no place like home’ for European investors?

Continental allocators facing difficult prognoses for their local markets are encouraging clients to ‘try something new’, but managers say Europe still has a role in portfolios.

Football teams are supposed to enjoy a competitive edge for games on their own pitch – ‘home advantage’. For European investors, playing at home might seem a definite disadvantage these days. Their home ground, of European markets, slopes sharply downhill, the conditions for playing on them are hostile and the political ‘referees’ are unable to gain control.

It is little surprise then that onlookers are leaving the stadium as the eurozone moves from one crisis to the next, major European stock indices fall by more than 10% to November, and ‘safe’ Bunds yielding 1% lose out to inflation at 3%.
Ben Olmstead, vice president product innovation at analysts eVestment Alliance, says Europeans are making significant withdrawals from European equities sector funds, which suffered outflows for 17 out of the last 19 quarters.

Flexibility

Their selling forms part of a broader trend eVestment identified among other Western world and Japanese institutional allocators to offload domestic markets. Europeans were preparing to rotate into global fixed income and some global equities, Olmstead says. Global equities might still encompass European markets, but he says the trend was to give managers flexibility to decide when, and when not, to emphasise regions.

Negative sentiment towards Europe and its investments is easy to find. The eurozone economy, plus those of Germany, France, the UK, and Spain expanded by under 1% last quarter, while southern Europe widely expects contraction.
Schroders’ European economist Azad Zangana expects the eurozone’s will “slow significantly” by year’s end, while US bank Wells Fargo said it “may already be in a mild recession, or at best will exhibit nearly flat-lined performance next year”.

François Savary, CIO at REYL & CIE says growth will not emanate from Europe. The Swiss private bank has had a “negative bias” on the Continent for 12 months. “If you look at what matters for the coming years it is growth and where you will get that from. One answer to that question is clearly not Europe, in REYL & CIE’s estimation. Over the past 18 months we have increased our EM exposure. Setbacks to assets there are buying opportunities.”

It is not just European shares falling from favour. Stefan Hofrichter, RCM’s head of global economics and strategy group, says: “We remain cautious on EMU periphery bonds.     

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