Confidence in the eurozone has taken a severe hit with a bearish attitude prevailing towards the bloc among investors after a slew of weak economic data.
Several managers have taken steps to reduce their exposures to Europe on the back of discouraging news, while others have claimed a sustainable recovery in the region looks unlikely.
The flurry of economic data released last week showed Germany’s economy had contracted 0.2 per cent between April and June, the first time the country’s economy has shrunk since 2012. Meanwhile, France continued to flatline and eurozone inflation fell to a four-and-a-half year low of 0.4 per cent in July.
Also yields on 10-year German government bonds were pushed below 1 per cent for the first time, showing a rush to perceived safety.
Paul Niven, head of multi-asset investment at F&C Investments, said concerns about the eurozone had prompted him to rid his funds of their overweight exposure.
“We have moved our Europe (ex-UK) equities position from overweight to neutral as recovery is broadening but not accelerating and industrial production numbers in Germany have been disappointing,” he said.
ING Investment Management also downgraded Europe from a small overweight to a small underweight and upgraded the US from neutral to overweight, based “primarily on the rapid weakening of the former’s relative data”.
Patrick Moonen, senior multi-asset strategist, at ING IM said the downgrade did not mean the company had “all of a sudden” turned bearish on Europe, but added Europe’s equity risk premium was “the highest in the developed world”.
This move was also supported by the Bank of America Merrill Lynch Fund Manager Survey last week, which showed just 13 per cent of asset allocators were overweight European equities, a fall of 22 percentage points in one month, due to “growing softness in economic data from both the core and periphery of the region”.
Dylan Ball, portfolio manager in Franklin Templeton’s global equity group, said risks in the eurozone were high, adding “we are not yet in normalised economic times”.
However, Mr Ball said it was not surprising Europe had “paused for breath” given its strong gains in recent years.
“History has shown that very few post-recessionary periods can lay claim to a straight-line recovery,” he said.
Some European managers also expressed bearish sentiments, with Artemis’s Mark Page and Laurent Millet stating they did not anticipate a strong recovery anytime soon, even if the next quarter produced good results amid the “anaemic conditions”.
Liontrust European equities manager Samantha Gleave said she was cautious given valuations were “quite stretched” and had been targeting firms she thought were more defensive, citing gas operator Enagás as a recent addition to her portfolio.
Some room for optimism
A growing number seem to be turning against Europe, perhaps urged in part by weakening data, but Four Capital Partners’ European equities manager Dino Fuschillo said the “wavering” in the data was not a huge concern compared to a large dip or extreme rise.
“I’m not saying we should be complacent but we have to accept we have had a huge rise and now we are levelling off,” he said.
Hermes Sourcecap chief investment officer Andrew Parry said not all deflation was bad, noting Europe had to become more competitive and that Spain was growing in spite of deflation.
“People always think deflation leads to stagnation, like in Japan, but that was [due to] a lack of structural reform and an aged population,” he said.
