Since the eurozone crisis started to build at the beginning of 2010 and through a number of peaks in investor anxiety towards the region, European fund managers have insisted quality companies will come good.
The argument goes that multi-national companies derive their business and revenues from a wide variety of sources and geographies and so the country or region they are domiciled should not prove too relevant to their resilience.
Yet for every European manager trying to reassure investors about companies in the region there has been a manager with the freedom to invest globally saying he is not prepared to touch the eurozone with a bargepole, at least for the moment.
Slowly this sentiment is starting to change. Over the past few weeks more asset managers have started to talk about the relative value in European equities compared to other equity markets – particularly those in the US that have seen a strong rally since the start of the year.
Clients’ asset allocation
This cautious optimism has started to trickle down to intermediaries too. Research from a recent Schroders Investment Conference in London, revealed that European equities are currently seen to be one of the most attractively valued asset class, with 41% of the 120 advisers surveyed intending to increase their clients’ asset allocation to this sector by the end of the year.
With regards to the US, nearly two-thirds (64%) believe that the risk of the fiscal cliff has been fairly priced in to risk assets, assuming that the worse-case scenario does not play out. In the event of the worst case scenario, only 5% are confident that the market is aware and fairly priced.
Meanwhile 21% of those surveyed felt that the US economy may not be as healthy as many believe and only 9% viewed US equities as sufficiently attractive in valuation to increase clients’ asset allocation over the next quarter.
Further figures from Skandia’s fund platform also show risk appetite among intermediaries returning. In its Q3 data, sales into cash fell by 38%, while investments into European and Japanese equities have increased.
Sales into European Equities rose 27% over the quarter, and although overall sales in this area are still low, they have now overtaken emerging markets – which fell 3%. The figures suggest that intermediaries are no longer predicting the worst from Europe, which is largely down to Mario Draghi’s commitment to do “whatever it takes” to save the eurozone.
Short-term volatility may still be expected, but the crucial difference is that investors seem to think a longer-term crisis has been averted.
Graham Bentley, Head of Proposition at Skandia, said: “The real growth going forward is likely to come from equities rather than fixed interest stocks. Equities generally continue to be undervalued, but real gains can be made from choosing the right sector for investment.
"It might surprise some people but the FTSE 100 is up almost 20% in the last year, and the FTSE 250 nearly 30%. Even European equities stand out as a potential opportunity as they are so undervalued, and the outlook for Europe is improving all the time.”
Are you looking to increase client holdings in European equities in the next six months, or are you waiting for a clearer signal the region is out of the woods? Use the comments box below…