Europe seen as unlikely haven

Investor sentiment for Europe has improved and selectors in Germany, Austria and Switzerland point to the fact that the eurozone is at least “relatively attractive”.

Global equity markets experienced a changing of the guard in the doldrums of the past three months. Even though fears about the US Federal Reserve tightening monetary policy heightened uncertainties and led to significant losses in asset classes from sovereign debt to EM currencies, European equities remained on the bright side.

The Spanish IBEX and Italian FTSE MIB indices gained some 15 per cent over a three month period to early-mid October against major US indices remaining flat.

Signs are that optimism on European stocks is growing.

The portfolio strategy team at Goldman Sachs published a note in early September suggesting that US institutional investors have flocked to European equities at a record pace, pumping $65bn into the asset class.

“We have seen a snap back in Europe. Capital has flown from the US to Europe. We have increased our equity weightings in Europe, especially as the asset class is still seen as oversold relative to buoyant US counterparts,” says Hans Hurschler (pictured), head of Portfolio Management at FRM, based in Zurich.


Indeed, a majority of selectors and investment managers in Germany, Austria and Switzerland InvestmentEurope spoke to have increased their relative positioning in Europe. This reflects a recent survey done by Bank of America Merrill Lynch (see chart below).


The bank suggests that fund managers have increased their overweight to European equities to the highest level in six years, making the asset class the “most preferred region”.

The recent US government shutdown may have helped. Cameron Brandt, director at fund flow data firm EPFR, has described Europe as an “unlikely haven” in the US fiscal impasse.

But selectors see more to the European story than just a decline in the attractiveness elsewhere. They point to macroeconomic improvement, such as the rise in Purchasing Manager Indices around the eurozone.

“Markets have not yet discounted the improvements in indicators such as the PMIs,” says Matthias Hoppe, vice president and portfolio manager for Franklin Templeton Multi Asset Strategies (FTMAS), which manages $30bn globally.

He stresses that hard facts have also changed around the ailing European economy: “Fundamentals have improved, current account and fiscal deficits in the periphery have declined, with some achieving primary surpluses. Adding to that consumer sentiment is improving.”

Frank Kümmet, senior portfolio manager in the European Equity team of DWS in Frankfurt points to recent revisions to the International Monetary Fund’s global
growth forecasts: “The recent review of global growth by the IMF showed very clearly that Europe has stabilised.”

At the same time the IMF has cut growth forecasts for emerging markets.

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