Asset managers are selling down their exposure to the eurozone as they are becoming increasingly bearish on the investment outlook, in spite of recent positive newsflow from Italy.
The Italian bond and stockmarkets rallied on Monday last week when Enrico Letta was installed as prime minister, ending the deadlock that had occurred since the Italian elections in February.
However, the past week also saw Spanish GDP figures indicate that the country was still mired in a recession, disappointing purchasing managers’ index (PMI) data from Germany and France and the news that eurozone unemployment had hit all-time highs.
John Ventre, head of multi-manager at Old Mutual Global Investors, who had positioned his funds to an overweight position in Europe mid-way through 2012, said he had recently moved to an underweight position in the region.
He said that while European equities were cheaper than they should be they were not as compellingly cheap as they were in 2012.
He had moved his multi-asset funds back to neutral in the early part of 2013, but he said he was moving to underweight because “monetary policy has been pushed as far as it can go” and that the fiscal policies of the eurozone countries weren’t supportive for investing.
“The risk of eurozone break-up has abated and it has now turned into a growth crisis, when will it ever get out of recession,” he said.
“With monetary policy stretched to the limit the only way to get economies moving is on the fiscal side, which is very much against the austerity policies that we have been seeing.”
In a sign that the region’s monetary policy had not quite been pushed to the limit, last week the European Central Bank (ECB) cut its main interest rate from 0.75 per cent to 0.5 per cent in an attempt to stimulate growth.
The rate cut came as the economic data pointed to an increasingly gloomy picture for the region, with unemployment hitting an all-time high and even Germany in danger of slipping into a recession.
Mario Draghi, the head of the central bank, also left open the possibility of cutting the rate even further, as well as committing to inject money into the struggling eurozone economies into 2014.
Azad Zangana, European economist at Schroders, said the rate cut seemed to be more to boost sentiment than to improve the area economically.
He said: “I don’t think it makes a lot of difference, but they are trying to show they are at least trying to boost the euro.”
However, Jacob de Tusch-Lec, manager of the £158m Artemis Global Income fund, said the situation in Europe was at its worst point for investors because the macro picture is neither good nor terrible.
“It is a bizarre bi-polar situation but European stocks do well if either global growth is so good that investors think Europe will be dragged with it or if the eurozone situation is so bad that politicians step in to do something radical,” he said.
“The bad time to invest is when the region is trundling along in the middle and that is what is happening now.”
Mr de Tusch-Lec said that although the new government in Italy was certainly more positive than the uncertain picture beforehand, Italy was “not out of the political doldrums and still has huge structural problems.
The Artemis fund had up to 40 per cent exposure to the eurozone in 2012, particularly in ‘deep value’ stocks. But the manager said they had largely run their course and, even though the region offered some opportunities, he was at his lowest weighting to the continent for more than a year.
Mr de Tusch-Lec said he had been surprised that markets had not fallen more than in the face of negative European newsflow this year.
But Mark Parry, portfolio manager on Aberdeen’s multi-asset team, said markets would not give governments and policymakers the benefit of the doubt forever.
“We hope governments, such as the newly-formed one in Italy, use this window of opportunity to push through reforms and stimulus measures but it is fair to say that right now we are seeing better opportunities elsewhere,” he said.