Over the last several weeks, industry heavy-hitters like Standard Life Investment’s Bambos Hambi have changed stance on Europe, revising their outlooks for the region’s growth and corporate earnings potential, politics be damned.
On his decision to move SLI’s multi-manager MyFolio portfolios from underweight Europe to neutral, Hambi said the elections in Europe “do matter” but the latest opinion polls did not point to major upsets in Holland, France or Germany. Greece has resurfaced as a concern in the here and now, but Hambi thinks it is more likely that the EU will “stick a plaster over the wound” than Grexit will occur.
But coming out as pro-Europe is still very much regarded as a contrarian play in the international investment management community. After all, European open-ended equity funds recorded their worst outflows since 2008 last year, according to data from Morningstar.
Seven Investment Management’s Ben Kumar suspects Europe is viewed as a contrarian bet by some because investors still vividly remember being burnt by politics in the region.
“One of the reasons people have been underweight in Europe for a long time was because in 2012 and 2013 and 2014, they got burnt by politics.”
Europe has also remained somewhat of an enigma to non-European investors who have preferred to dip their toe into the region via the UK, which is one of the reasons the FTSE 100 continues to do so well.
Part of the reasons managers seem more willing to invest in the region now, said Kumar, is because “Brexit vote aside, nothing major happened in 2016.” The “usual eurozone crisis didn’t materialise.”
In addition to this much-needed reprieve from the recent pattern of annual crises, worries of Deutsche Bank going bust have mostly been alleviated, he pointed out, allowing investors to breathe a collective sigh of relief in 2017.
Another compelling argument for investing in Europe is one part valuations and one part improving economic data.
“The European equities market is facing a few political events this year but if you extrapolate from what happened after the US and the UK last year, markets will begin to focus on fundamentals and rally,” Kumar said. “European stocks are undervalued fundamentally compared to the US and the UK. If you believe the political situation is less of a worry for markets than headlines would have you believe, there seems to be a decent rationale for investing in Europe.”
