Psigma’s Tom Becket has slashed the exposure to European equities throughout his portfolios, having given up on the “hope trade” of a European recovery.
The discretionary manager had built up exposure to Europe to “extreme” levels in the summer of 2013 based on the “promise of a recovery in sentiment and activity”.
But Mr Becket, Psigma Investment Management’s chief investment officer, said the large allocation was now “unjustifiable”, particularly given the strong rally seen in European equities last year.
He explained that European assets were now “very much a consensus trade”, with a large number of managers having bought into the region expecting a recovery.
But Mr Becket warned that the threat of a “secular stagnation” meant such optimism may be unfounded, especially in the core European markets such as Germany and France.
The MSCI Europe ex UK index currently has a price to earnings ratio of more than 16x but Mr Becket said such a rating was “only really acceptable if you are going to get decent earnings growth”.
But far from growing, Mr Becket said European company earnings had fallen by roughly 10 per cent in the past two years, while equity markets rose by close to 45 per cent.
Mr Becket said while many analysts expect earnings growth to pick up to justify current valuations, he no longer shares that view so he has taken money out of Europe.
The manager still maintains an overweight position in European equities across Psigma’s discretionary portfolios, but explained he was focused on the peripheral countries “where valuations and long term recovery potential hint at an exciting contrarian trade”.
