Monday, October 22, 2012

Investors warm to European equities

Investors have turned bullish towards European equities for the first time since the 2009 loss of Ireland’s AAA credit rating heralded the onset of the eurozone sovereign debt crisis.

Stimulated by the bond-buying plan initiated in September by Mario Draghi, president of the European Central Bank, investors and fund managers have begun increasing their equity allocations to Europe, a move that may continue a recent rally in European stock market indices.

Andrew Parry, chief executive of Hermes Sourcecap, a European equities fund manager with $2bn under management, said that in the past month his firm had seen new inflows from existing pension fund clients increasing allocations. This is the first time in the firm’s five-year history that its existing clients have added to their investments.

He said: “For most of the time we’ve been in business, European equities have been competing with Japanese equities for the title of most unloved asset class. However, in the past month, for the first time, we’ve seen evidence of asset-allocation inflows to European equities.”

Hans Benenga, head of European business development at Aberdeen Asset Management, said: “We’ve certainly seen a pick-up in interest in European equities over the past few months. Institutional investors appear more willing to meet managers and are also conducting searches.


“This could be due to them recognising the opportunities at the company level that exist despite the overhanging macro concerns.”

Morgan Stanley Investment Management said it too had noticed an increase in investors’ interest in European equities.

This month a global survey of 120 fund distributors, conducted by Schroders, found that European equities are now viewed as one of the most attractively valued asset classes. Forty-one per cent of those surveyed said they intended to increase their clients’ asset allocation to this sector by the end of the year.

Peter Beckett, head of international marketing at Schroders, said: “Despite ongoing uncertainty across Europe, this survey has highlighted a possible turning point in investor sentiment towards European equities and risk assets. Valuations look particularly attractive at the moment.”


Meanwhile, he said, investors are showing caution towards the US, where uncertainty surrounds the health of the economy and fiscal issues.

Alan Higgins, UK chief investment officer at Coutts, said: “Our confidence in equity markets has steadily increased. In response to this, we are gradually reducing our exposure to cash and investment-grade corporate bonds to buy 3% in global equities, with a preference for Europe – selectively. If the positive global economic data flow builds momentum, and Spain accepts help from the ECB and the US politicians manage to avoid the fiscal cliff, equities could do very well.”

The most recent global survey of fund manager sentiment, which is conducted every month by Bank of America Merrill Lynch, last week recorded the third consecutive month of double-digit positive moves in sentiment towards European equities. This is the first time this has happened since summer 2009. A net 9% of managers identified the eurozone as the region where they most want to be overweight. In August, a net 5% nominated the region as their top prospective underweight.