Come again? Funds say Eurozone the top sector
- Eurozone stocks have jumped since the ECB’s QE announcement
- About 58% of survey respondents expect China's economy to weaken
- US equities and bonds will also lose out, say fund managers
By Adam Courtenay
Readers of TradingFloor.com may be surprised to know that fund managers think Eurozone equities are where it’s at for the next year at least, according to Bank of America-Merrill Lynch's global fund manager survey. This is a monthly survey and thus expectations can easily shift – so I’d be interested in seeing what fund managers say about Europe if Greece exits the scene anytime in the near future.
Of course, it’s all about monetary stimulus from the European Central Bank. This has been the catalyst for all the positive sentiment. The survey found that 51% of fund managers with regional specialty say Europe is their top equity pick over the next year, an enormous leap from the 18% recorded the previous month. Over 80% say they see the European economy strengthening in the next year. “The ECB has successfully vanquished global deflation fears and induced the return of reflation trades in February,” says Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research.
Could sophisticated investors really be cheering the quantitative easing program brought in by the European Central Bank to the tune of €1.1 trillion over the next 18 months? There’s some evidence they have a point. European stocks have jumped since the ECB’s announcement, with the EuroStoxx up 7% in the past month and the German, Spanish and Greek indices each rising over 5%. Italian stocks have risen by over 10% and France’s CAC 40 Index has lifted by 8%.
I’m surprised by this burst of optimism – my feelers have it that investors are largely sceptical about Europe’s quantitative easing experiment. It’s always smacked of a last resort measure, the thing you do when you haven’t got a clue about stimulating economies. But the institutional money represented in this survey is saying otherwise. There’s a strong argument to say that Europeans will find that monetising massive amounts of Eurozone sovereign debt won’t rescue the economy or do much in the way of creating inflation. ECB president Mario Draghi hopes that bond purchases will push money out into the broader economy through a “wealth effect”, but critics fear this will be worse than useless if it leads to an asset bubble without gaining traction on the real economy.
With sovereign bond yields already close to 0%, and with negative yields in some cases, private banks are likely to sit on the central bank credit that the ECB is buying. What’s the point of producing new loans when the interest rate they can charge is not much more than 0%?
And yet the vast bulk of 157 global fund managers surveyed (with a total of $459 billion under management) are Eurozone-positive. They are not just broadly in favour of Eurozone equities, they are said to be exuberant about it, according to the global survey.
What it does go to show is that the central banks – and the ECB in particular – have achieved this much at least: markets are in their thrall, and whatever they do the market is following. The biggest QE program in the world right now is pulling in the biggest support from institutional money – well, in February at least. “Put simply, investor optimism/pessimism is now completely in thrall to central bank liquidity policies,” according to Hartnett.
So which sectors will benefit? In equities, autos are now European regional investors’ favoured sector and as many of a quarter of them are overweight here. The travel and leisure area has also gained support while banks and insurers saw notable declines in support.
It’s hard to see how Europe will stand out as a beacon for hot new money but it may be because everywhere else is in state of zero growth as well. Expectations for China have only decreased, with 58% of survey respondents saying they expect the country’s economy to weaken over the next year, the lowest reading the survey has seen in almost two years. The World Bank is reducing global growth expectations from 3.4% to 3%, and the International Monetary Fund, from 3.8% to 3.5%.
Of all countries, the US stock markets are deemed by the survey to be the main loser among fund manager respondents. The survey says those remaining overweight in US equities have declined to a net 6% of managers surveyed, down 18 points against last month. The winner, overall, is not Europe as a whole but those who are in the Eurozone. So the UK, Switzerland and Sweden will miss out. Overall, fund managers have increased their allocations both to stocks (a net 57% overweight, up six points month-on-month) and cash (a net 22% overweight, a five-point rise).
Bonds as an investment class will also lose out according to the survey, which are now seen as overvalued and also viewed as the asset class most vulnerable to increased volatility this year. Technology remains world's favourite sector, utilities the least favourite sector, the report says.
– Edited by Robert Ryan
Adam Courtenay is business writer and editor with TradingFloor.com, the home of social trading