Global optimism doesn't stretch to Europe
A leading fund manager survey has revealed optimism continues to abound across the globe, but Europe is investors' least-preferred destination
Of the 226 managers surveyed, 62% believe the world economy will improve in the next 12 months and, for the first time since December 2007, the majority of respondents are now Overweight equities. Drilling down, however, the optimism seen on the global scale is not equally distributed: global investors view Europe as their least preferred destination and European equities are no longer seen as cheap.
Furthermore, though 62% of respondents see improvement in the global economy on the horizon, 70% see the European economy suffering further over the next year against last month’s count of just 65%. And a net 23% of respondents selected the Eurozone as the region they would most like to Underweight—continuing a trend that has now been seen since February 2008. The net Underweight stance on UK equities remained in place, as it now has done for more than six years, the survey revealed.
Within Europe, the combination of the recent stock market rally and the drop in trailing earnings is likely to be the cause behind a mere 2% net of respondents saying equities in the region are undervalued, Merrill analysts believe. Not only is it clear that investors no longer see European equities as cheap but this is the worst reading from the stockbroker’s monthly manager survey since September 2000.
“This arguably could change quickly over coming months as the earnings picture becomes clearer,” the research report said this morning. The broker expects earnings to trough in the early part of the fourth quarter and sees decent valuation support on a mid-cycle earnings approach.
Turning to sector performances, Overweight conviction within Europe is concentrated in just two sectors: Oil & Gas and Technology. This is in tune with the pro-China positioning that global investors have taken up, whereby the perception that China’s growth is central to a global economic recovery has led to global asset managers being Overweight technology, energy and materials.
“Investors are rewriting the rules for positioning their portfolios at the start of a new investment cycle,” the report pointed out, adding that rather than focus on moving from defensive to early cyclical stocks, such as consumer discretionary, investors are basing their strategy around optimism over Chinese growth and emerging markets performance.
Indeed, June’s survey revealed that European investors are modestly Overweight on Industrials and Basic Resources—two cyclical that are not usually thought of as early cycle. The survey also revealed the biggest Overweight of commodities as an asset class in the past three years.
From a global perspective, fund managers are now Underweight every single defensive sectors (pharma, staples, telecoms and utilities). “If it is correct that European views will at some point be forced to catch up with those elsewhere, this could lead to another bout of pro-cyclical rotation after the current pause for breath,” today’s report claimed.
Though Europe may be lacking in optimism, this month’s survey implies that fears of a double-dip recession have at least been shrugged off and investors’ appetite for risk is softly creeping up. Summing up, Banc of America Securities-Merrill Lynch’s head of European equity strategy, Gary Baker, said: “While investors are finally overweight equities, risk appetite remains relatively constrained. Investors seem happy to underweight defensives at this point, but overweight conviction is tightly concentrated on just two sectors; energy and technology.”
