BofAML’s latest European fund manager June survey found that 35% of investors said they would go underweight Italian stocks over the next year, compared to around 4% in May.
The survey noted that this was the second lowest sentiment intention for the country in four years.
Last month, Italy’s political turmoil led some fund selectors to completely cut the market out of their portfolio allocations. However, Italian stocks did rally this week (see chart below).
Italian stock index six months to 15 June 2018
Investors’ sentiment toward Spain also dropped, with investors now preferring to be underweight the country after it being the most popular when the fund managers were last surveyed a month ago.
This is unsurprising as at the beginning of May, Spain’s government collapsed after its prime minister, Mariano Rajoy, was ousted and replaced by Pedro Sánchez.
Germany is now the favourite European market with 29% of investors saying they preferred to be overweight Germany.
Looking at the DAX index, German equity returns have been on the rise since the end of March this year but have not fully recovered their losses since the global selloff in mid-January.
Deutsche Boerse AG German Stock Index DAX six months to 15 June 2018
Lowest sentiment on Europe since Brexit
Fund manager sentiment towards Europe in general has also dropped to the lowest since Brexit with fund managers preferring to be underweight. Global emerging markets, Japan, and the US were the markets they wished to be overweight in.
The bank’s survey also found that 9% of European fund managers believed that Europe’s economy would weaken over the next 12 months. It said this was the worst reading since the Brexit vote.
The fund managers cited the three biggest tail risks to global markets as a trade war, a Fed/European Central Bank (ECB) policy mistake, and a euro/emerging market debt crisis.