I’ve received a stream of press releases in recent weeks, usually from European equity fund managers, declaring now is the time to get back into Europe. But while the continent is home to many worthy companies, the evidence supporting a major shift in allocations back to Europe is far from clear.
According to FE Analytics, the average fund in the IMA Global sector had 15.04% of its portfolio allocated to European equities at the end of the third quarter, compared with 14.82% at the start of the year.
With such a marginal rise, it seems managers with the flexibility to go anywhere in the world are not rushing back to Europe.
And – to look at the example of one closely watched investment trust – Alliance Trust attracted some attention recently when it invested £35m in Europe on the back of “increasingly compelling” valuations.
But lets not forget that £35m is a tiny drop in Alliance Trust’s £2.6bn portfolio – of which just 12.2% was allocated to Europe at the end of the third quarter.
Things seem to be improving in Europe
At Portfolio Adviser’s recent Europe Expert Investor event, European equity managers such as Henderson’s John Bennett and T. Rowe Price’s Dean Tenerelli offered a range of convincing arguments in support of the region, pointing out that companies are in good shape and valuations are cheap.
Bennett stressed European businesses’ international presence, saying they are “global companies with the misfortune to be born in Europe”.
Europe bulls also draw attention to an apparently improving macroeconomic picture, citing structural reforms in a number of the eurozone’s members, Mario Draghi’s promise to do “whatever it takes” to save the single currency and the European Central Bank’s subsequent unveiling of outright monetary transactions (OMT).
Of course, the situation in Europe has improved remarkably since the start of the year. Psigma Investment Management chief investment officer Thomas Becket said recently that “Europe is not the infected wound that it was for most of this year” and it’s hard not to agree with that sentiment.
But what’s really changed?
Some argue that the OMT and progress in structural reform have completely removed the risk of a eurozone break-up. But the fears that stalked the market earlier this year – concerns about a two-speed eurozone and the exit of at least Greece – have been only pushed into the shadows, not eradicated.
OMT could be seen as just another form of kicking the can down the road. Draghi has gained the faith of the markets without spending a single euro but this faith is yet to be tested in any meaningful way. And structural reform is not bold enough to fix the problems put in place at the very start of the eurozone experiment.
Across the eurozone periphery, unemployment remains dangerously high levels – with Spain’s reaching 25.8% in September – and looks likely to keep climbing. The productivity of southern Europe is also substantially below that of Germany while a two-speed eurozone and the problems that it creates are far from being solved.
Europe also faces the prolonged period of weak growth, adding more burdens on its companies. Even Germany, the region’s economic powerhouse, is not immune, with data yesterday showing the country’s exports as falling by their fastest pace since last December.
Greece remains a concern, despite the recent lack of headlines on the country. Capital Economics and Lombard Street Research both believe that a Greek exit from the eurozone is not off the table, with Capital Economics expecting to see this take place next year.
The passing of more austerity measures in Greece and the resulting social unrest demonstrates that the medicine could be killing the patient. Expect the debate on whether the country should stay in the eurozone to resume soon. Meanwhile, other members of Club Med might start thinking the pain of exit could be outweighed by the longer-term benefits of improved competitiveness and growth.
If Greece does quit the currency bloc then all bets – and especially European equities – are off. Global stock markets would likely tank on the news but Europe and the companies with the misfortune to be born there would take the brunt.
