Boosted by quantitative easing and low oil prices, European equities have outperformed the US thus far in 2015, and with investor sentiment starting to drift away from the US could have some way to go.
However, while UK and European-based investors have recognised the market shift, Lanning believes that an influx of investment is due from their international counterparts.
“Around November we started to feel that perhaps people were being too negative about Europe,” he said. “We understand that there are some concerns out there – Greece, Ukraine, and others – but people are starting to run out of excuses as to why they should not buy.
“There are a lot of overseas investors who are still under-invested in Europe, and asset allocators have a way to go in reflecting the renewed [UK and European investor] optimism in what’s happening.
“One of the reasons that some of them have not moved yet is Europe having done so well this year. So they are in a position where they have seen the market outperform the US by around 15% and think they cannot chase it any higher, but I think that Europe has further to go.”
Taking from the dollar and giving to euro
Lanning cited the tailing-off of funds going into the US market as one of the decisive factors, alongside other drivers, and predicts an upgrade in European corporate earnings.
“We see more upside for European equities than in the US,” he explained. “There is money coming out of the US into Europe, and there is potential for it go much further.
“Economic growth is going to be better than the market is expecting. It is not off to the races, but we will see some positive growth that the market is not pricing in, driven by the weakening euro, QE and low oil prices.
He continued: “There will be earnings upgrades coming European companies in the next earnings season. I think CEOs in the US will be starting their company presentations saying that the strong dollar is a bit of a headwind, while the weakening euro will be acting as tailwind for European corporates.
“Can the euro go to parity with the dollar? It probably can. We are going to see the Federal Reserve tightening policy at some point this year, alongside a -0.2% interest rate policy in Europe. Also, people should be constructive on risk assets even if the Fed does start to raise interest rates.”
Cautiously optimistic
Lanning’s confidence is reflected in his Fusion Growth Plus Fund allocation.
Having had a 42% weighting to US equities in early November, he brought it down to 19.5% and used some of the proceeds to take his European exposure up from 13% to 26.5% of the portfolio.
Lanning highlighted his holdings in the Wellington Strategic Growth and TT International European Equity funds as likely beneficiaries of economic growth.
However while positive on the market, he is wary of the influence that the aforementioned overseas investor reticence could have on the landscape, and has adjusted his exposure accordingly.
“It will not go up in a straight line,” he explained. “We actually took 2% out of Europe [on 25 March] so we are now at 24.5%, having been adding to our European conviction through November. We are overweight Italy through the Milano Italia Borsa index, so we are still at elevated levels in our European exposure.
“We have also raised our cash position to 6%. Having that cash feels like dry powder. If we see a meaningful pullback in markets – which is not our central case, otherwise we would have more – we would put some of it back to work. That is the effect of overseas investors being underinvested Europe: I think a lot of them are waiting for a pullback, so if there is a lot of pent-up demand on the sidelines the market will not fall as much as they want it to.”
