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Managers still favour European equities over US

Managers still favour European equities over US

Sebastian Cheek
Friday 5th May 2017

Asset managers remain bullish on European equities relative to their US counterparts, despite political uncertainty across the continent.

This optimism is being driven by a combination of good earnings potential, attractive valuations and more accommodating policy by the European Central Bank.

On 24 April the Eurostoxx 50 index saw its biggest one-day gain since July 2012 racking up 3.9% on the back of stellar performance by banking stocks. This upward trajectory has continued with the index hitting 3,619 on 4 May.

Positive sentiment has been buoyed by the UK economy holding up better than expected following the Brexit vote last June and the increasing likelihood of Emmanuel Macron beating Marine Le Pen to the French presidency on 7 May.

Speaking at an event in London this week, Eaton Vance director of global equity Christopher Dyer said European companies currently look better value relative to the US on a number of metrics, including price-to-earnings.

However, he added it was on a price-to-book value basis that they have “never been cheaper” than now.

Dyer observed for the year to 27 April, the total return of the European component of the MSCI World index in US dollar terms was 11% compared to 8% for the US section.

He also noted the gap between European equity dividend yields and government bond yields was at an all-time high, meaning equities currently offer investors a better source of yield, albeit with added risk.

Eaton Vance has moved 5% of its US equity allocation into Europe. The manager had been slightly overweight US on the back of the potential for lighter financial regulation under the Trump administration, but upped its European weighting as that potential became reflected in valuations.

In terms of specific sectors, Dyer said the manager had moved into financials, particularly banks. Elsewhere, industrials have shown an improving global growth outlook with mining, construction and oil and gas seeing good market demand.

Dyer said a potential victory for Macron followed by Angela Merkel successfully retaining her position as German chancellor in September, would likely improve business growth in Europe.

However, he cautioned the threat of populism remained in Italy ahead of the election next year.

Eaton Vance customised solutions portfolio manager Justin Bourgette, agreed US equities are currently overvalued “however you slice and dice it”.

He said there is the potential for Europe to deliver a return of 2% to 5% more over the year than the US because it is positioned much earlier in the cycle.

Elsewhere, Bank of America Merrill Lynch also believes Europe has further to run.

In a global research report published last week, the fund house said it had recently increased its earnings per share (EPS) forecast to 15% in 2017 and 10% in 2018, slightly above consensus for this year (14.5%) and in-line for next.

“We also see potential upside risks to equity valuations from declining political risks in France and strong potential for fund flows into Europe to recover further,” the report added.


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