A positive view on European stocks
“An Englishman, a Frenchman and an Austrian with Polish roots walk into a bar. And the Englishman says … ”
Fear not, dear reader (not to mention editor, in-house lawyer, diversity officer, gender auditor, human resources director, complaints commissioner, etc). This is not the beginning of an offence-laden joke playing upon Brexit injustices and nationalist prejudices.
No, rest assured, if we at the Financial Times were actually to tell jokes about our European neighbours, they would be like those of Bernard Righton — the politically correct version of a 1970s velour-suited chain-smoking entertainer, as played by contemporary comedian John Thompson. Sample material: “There’s a black fella, a Pakistani and a Jew in a nightclub . . . What a fine example of an integrated community.”
And that is why the introduction to this column carries an equally benign punchline: “And the Englishman says: ‘As wealth managers, we all feel positive towards European equities — what a fine example of consensus portfolio allocation.’ ”
In fact, when FT Wealth actually asked several Brits, a few Frenchmen and at least one Austrian with Polish roots about European shares, they all came out with the same line: “I’m not saying my allocation is overweight, but … ”
If anything, it was the English, or certainly the British, who were most pro-European. Kevin Gardiner, global investment strategist at Rothschild Wealth Management, said: “Threats from populism, Italian banking and economic stagnation have failed to materialise and investors should have a more positive view on eurozone stocks.”
Jonathan Bell, chief investment officer of Stanhope Capital, was equally embracing: “Investors should rebalance their equity portfolios to increase their allocation to Europe at the expense of the US.” And Iain Tait, head of the private investment office at London & Capital, said: “We felt Europe had longer to run in its current cycle.”
In this, they concurred with several Frenchmen, not least Stéphane Monier, head of investments at Lombard Odier Private Bank, who remains keen “to play the improving economic conditions in Europe”. These conditions, agreed Julien Lafargue, European equities strategist at JPMorgan Private Bank, have “led investors to reconsider their exposure to the region in the past three months”.
And Markus Stadlmann, the Austrian chief executive of Lloyds Private Bank, who once told another FT magazine all about his Polish heritage, said he knows for certain that investors feel more positive about Europe — because his bank’s investor sentiment index on the eurozone is up 36 per cent this year.
What is behind all this harmony? Politics, incredibly. And the economy.
Following a “benign outcome” to the elections in the Netherlands and France, Monier notes that company executives have reaffirmed their optimism on the economic cycle, with many highlighting renewed interest for foreign investment.
“Investors will certainly have taken comfort from some of Europe’s geopolitical uncertainties easing off,” said Stadlmann, with a degree of understatement.
Even Brexit seems less contentious to Yogesh Dewan, chief executive of Hassium Asset Management: “The state of the UK political scene implies a softer Brexit is more likely, the French elections concluded with Eurocentric Macron in power and Germany’s Angela Merkel is set to win her election in September. Thus, there is less to concern investors politically on the continent.”
From London, Edward Park of Brooks Macdonald can see this politico-economic consensus supported by strong European corporate earnings, with earnings per share growth of Stoxx 600 index constituents up 23 per cent in the first quarter.
“Earnings have already started to rebound strongly, on track to grow more than 15 per cent this year,” agrees Mathieu L’Hoir, senior multi-asset portfolio manager at Axa Investment Management. “Earnings per share revisions are still stronger in the eurozone while most US sectors are seeing numbers edge lower.”
There is just one big problem: the new-found strength of the euro. This has made it more expensive for US dollar-denominated wealth managers to invest in Europe, Monier notes, and reduces the valuation attractions. “Only a strong euro prevents us from being more aggressively overweight European equities,” he explains.
John Veale, deputy head of investments at family office Stonehage Fleming, sees the irony. “Monetary policy also remains benign and fiscal austerity is easing. However, these positives are, to an extent, counterweighted by a stronger euro, which may dampen the performance of export-oriented industries.”
Where then to invest? Again, an unlikely consensus emerges: European banks.
While acknowledging concerns over non-performing loans and low returns on equity, Lafargue argues that stronger economic growth usually leads to more lending and improving credit quality, which, with deflation fears receding, would come as the European Central Bank normalises interest rates.
Higher rates mean higher profits and returns. And Monier agrees with Tait: “We favour European banks: an improving loan growth and interest rate cycle with a more benign regulatory environment.”
But is anyone finding this consensus annoying?
Thank goodness for Christophe Donay, head of asset allocation at Pictet Wealth Management. He has a viewpoint that contradicts all the harmony being spouted over investing in Europe.
“We expect economic growth in the euro area to start to slacken in the second half of this year and to slip to 1.6 per cent in 2018 . . . we think the time to raise allocation to European equities has already passed.”