Some 50% of Europe’s fund selectors told us during our latest Pan-European survey in December that they plan to increase their exposure to European equities. This means it still is the most popular asset class, and appetite has only come down slightly compared to the previous quarter.
However, European equities are beginning to lose their appeal in some countries, and risk being sold off if they don’t deliver on one particular aspect: earnings growth. At least four in 10 fund buyers in every European country were planning to increase their exposure to the asset class back in October. But this is no longer the case: in Denmark and Norway, there are now far fewer buyers of European equities than in the previous two years or so.
Most investors in these two countries have now put their allocations to European equities on hold.
“We are still overweight European equities, but we don’t plan to increase any further for now,” says Arild Orgland, managing partner at the Norwegian wealth manager Industrifinans. “We have been disappointed by European companies’ earnings growth in 2015, as the positive tailwinds we expected from the lower energy prices and the weaker euro haven’t translated into higher earnings,” he says.
But Orgland is prepared to wait for a while to see whether these benefits will finally kick in. “So we are not yet reducing our overweight yet,” he says. After all, there are few alternatives to European equities. US stocks look expensive on all metrics, and struggle to grow profits because of the strength of the US dollar. “The strength of the US dollar is possibly the canary in the coal mine, as the dollar is so strong partly because it is perceived as a safe haven,” says Orgland.
However, the Norwegian remains on the positive side when it comes to his macroeconomic outlook. “A global recession is still not my base case, though the probability this will happen has increased.”
Between a rock and a hard place?
In the meantime, European equity investors are considering their options after the most dismal start of the year since 1929. And they will probably conclude that none of those look particularly attractive. US and Japanese equities have had almost as bad a start to the year as European equities, and EM equities have been the worst performer of all.
So is a return to bonds an option at all then? Fixed income has been deeply unpopular over the past year, but year-to-date it has performed its traditional function of providing safety in volatile times: the iBoxx Euro Corporate Bond Index is flat for the year.