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Fund selectors make a strong case for Europe and drop US

Both European equities and absolute return are now more popular with European fund buyers than ever before, according to Expert Investor Europe’s freshest Pan-European data. For both asset classes, the majority of fund selectors are telling us they will increase exposure. Appetite for US equities, by contrast, is at an all-time low.

Almost two thirds of Europe’s fund selectors intend to increase their weighting to European equities, while only 6% plan to decrease it, the lowest reading we have ever seen. The attitude of Rishma Moennasing, an equity fund analyst for Rabobank in the Netherlands, mirrors that of many of her peers.

 

“We are overweight European equities now, and we see room to increase even further,” she says. At the moment, everything looks good for European stocks, she argues. “The low oil price and the cheap euro both provide upside to European equities. We see room for the present rally to continue for at least one more year.”

José Luis Borges, head of institutional portfolios for BPI Gestao de Activos in Lisbon, is also overweight European equities. “We think there are some strong tailwinds for European equities, two of them being the depreciation of the euro and lower energy prices. Sovereign QE also benefits the asset class – it pushes investors to accept lower risk premiums.”

But he is not sure he will increase his allocation further this year. “The rally in European equities in the first quarter of 2015 was due mostly to multiple expansion,” he says. “However, we would like to see a significant increase in earnings to justify a higher allocation to European equities. Expectations for 2015 are for approximately a 10% increase in earnings per share, and we would like to see that number being revised upward. If that happens, and earnings estimates for the second quarter are higher than expected, we might increase further.”

 

This unprecedented popularity comes amid an increasingly bullish macroeconomic outlook, which is also breaking records after a slight dip in the final quarter of last year. Some 68% of our interviewees have a positive view on the economy now, especially regarding the eurozone’s ultimate economic recovery.

US equity exodus

On US equities, things look quite different. The feeling that stocks across the Atlantic are overpriced is not universal, but it’s getting close. Those who intend to decrease their allocation to US equities

outnumber those wanting to buy more by more than three to one, a ratio never seen before in any equity asset class in the history of EIE’s asset allocation survey. Most of the fund selectors we have been recently interviewing find US equities expensive, and don’t really see opportunities. They have made fantastic returns on the asset class over the past two years, and are therefore happy to take some profit.

 

“In 2014 the valuations of eurozone equities were compelling compared to US equities. After the strong European equity rally in Q1 2015 this is less clearly the case, but we still favour European equities to US equities on a comparative basis,” says Borges.

Part of the Bonhill Group.