Threadneedle: Europäische Aktien wieder attraktiv

Despite there being much to consider over the last few months, we have made few changes to portfolios, largely leaving our overweighting to risk assets intact, and within equities and fixed income, our bias towards Emerging Markets. We have, however, changed our stance on Europe, moving from being underweight to neutral.

Our view has been that a combination of zero interest rates, on-going QE, and slowly improving economies would be supportive of equities and credit, and this has largely been born out, albeit with a level of heightened volatility largely around short term data points exceeding or undershooting expectations. What has perhaps been less expected is the very strong outperformance of developed world equities, particularly US which have risen significantly over the last 3 years. Driven by modest valuations, robust balance sheets, shareholder friendly buy-backs, and a robust profits outcome, US equities, and to a lesser extent European equities have risen sharply, experiencing a re-rating that has caught many investors by surprise. Emerging markets have performed less well, undermined by soft Chinese data, fears of credit tightening by the new Government, and some individual currency weakness. Despite enjoying higher levels of relative growth, this has not prevented Emerging Markets from significantly underperforming the developed world.

What next?

As the growth outlook has started to improve, investors have begun to focus on the next phase of policy initiatives. Over the early part of the summer, the Federal reserve introduced the concept of “tapering” its stimulus measures as the growth outlook in the US became more robust and self-supporting. Accompanied by forward guidance, outlining the indicators and statistics that would drive the decision making process, the market increasingly focussed on a reduction in the QE programme starting in September with a rise in short term interest rates expected some 18 months later. This prompted a significant sell-off in the Bond market as investors began to price in a normalisation of monetary policy and its accompanying yield curve. With that in mind, that the Fed “blinked” at its last meeting and left the $85bn a month QE programme intact came as something of a shock and accompanied by the many conflicting comments coming from various Fed members, has undermined the credibility of the US central bank. It is now very unclear what, who and how will trigger a change in policy. We will probably have to wait until we know the name of Ben Bernanke’s successor before we can again look to a move away from the monthly injection of liquidity the markets had come to depend on. It is concerning that the rise in long term interest rates that accompanied forward guidance could well be the very thing that prevented the exit strategy. Rising yields reflecting reduced QE and a more robust growth environment led to slowing growth, with a particular slowdown in the pickup we had been seeing in the housing market, amongst other things. If this is the case, an exit from QE perhaps remains a distant prospect.

Changing our stance on Europe

In any event, the leading indicators, and feedback from our company meetings had suggested that US growth would moderate in the second half. This is in surprising contrast with what is currently being seen in Europe, where a broad range of leading indicators suggest that even if growth isn’t accelerating, in much of the region, conditions have stopped getting worse. What is also clear is that Austerity is becoming less of a focus for the periphery, concerned with its social impacts, and fragile evidence that it is proving successful. Whilst it is true that many of the problematic imbalances have improved, the debt overhang shows no sign of being contained, and is an issue that will have to be addressed again at some stage.

Nevertheless, the uptick in the leading indicators has prompted us to revisit our long held underweight in European equities. On a global basis, particularly against the US, valuations are attractive and we are once again able to find an increasing number of interesting investment opportunities. With global growth looking more robust than it has for some time, the prospect for many of the global champions listed on the European market has improved and we have become more constructive in the asset class moving to neutral.

In order to change our stance from neutral to overweight, however, we would need to see a greater pick-up in the underlying European economy. Europe is not a growth story yet.  And while we are much closer to a stable Eurozone than we were in the early aftermath of the financial crisis, a few boxes remain un-ticked. Yes, there are open-ended commitments to buy troubled debt, current accounts are moving back to surplus, Italy and Spain have achieved non-stressed rate levels and the restructure of Greece and Cyprus went ahead without inducing contagion. But in order for us to get behind Europe, we would need to see  a better capitalised banking system and structural changes implemented that would enable economic convergence and a greater move towards true fiscal as well as political union.