Posted inAnalysisEquitiesEuropeFixed IncomeUnited States

Fund buyers put faith in Europe, turn bearish on US

Exactly half of Europe’s fund buyers are now planning to increase their allocation to the asset class over the next 12 months, up from less than a third at the end of last year (see graph below).

 

That bullishness on European equities is shared by fund selectors’ sell-side counterparts. Return expectations for the asset class among asset managers fell during 2016, before spiking suddenly in the new year. When polled in March, half of asset management companies that participate in our survey, organised in co-operation with Old Mutual Wealth, now expect European stocks to return more than 5% over the next 12 months. 

And the asset class is on course to deliver such an outcome: over the past three months they MSCI Europe has risen by 8.54%. 

US equities – bears abound

This stands in sharp contrast with the meagre 0.77% US equities returned in euro terms over the period, suggesting Europe’s fund buyers have made the right choice by keeping their money invested close to home. US equity bearishness, however, is only a very recent phenomenon: as recently as January, we reported a surge in US equity sentiment on the back of Donald Trump’s election victory. 

But the unexpected jump in the S&P 500 that was quickly dubbed the ‘Trump rally’ has now made US equities simply too hot to handle for Europe’s fund buyers. 

 

Net sentiment (the number of respondents intending to increase their exposure minus those saying they will decrease it) towards US equities had its largest ever quarterly drop during the first three months of the year. Buoyancy has given way to extreme caution.

In December, bulls outnumbered bears by a factor of two. US equity optimists were in a majority in all European countries bar Spain and The Netherlands at the end of 2016. Four months on, it is almost the exact opposite and bears have taken charge. 

Read on the next page how appetite for high-yield bonds is affected 

 

Part of the Bonhill Group.