Multi-asset managers are bullish on Europe in spite of recent data showing retail investors’ faith in the region has been severely rattled.
Statistics from the Investment Management Association (IMA) have revealed that October was a tough month for European equity funds as the sector suffered outflows of £347m in the month, its largest since July 2008.
The IMA European Smaller Companies sector was hit particularly hard, with its largest monthly outflow ever of £288m.
But while retail investors have been fleeing the area, nervous of whether or not Europe’s recovery can be fully ignited, multi-asset managers have been spying opportunities and increasing their exposure to the continent.
Schroders multi-managers Marcus Brookes and Robin McDonald said investors who had a dismal view on Europe in 2015 could be in for a surprise.
“We think the combination of an expanding European Central Bank [ECB] balance sheet, a gradual pick-up in credit growth due to record low funding costs for corporates and consumers, and the disposable income boost from lower oil prices has the potential to confound very low expectations for Europe next year,” the duo said.
Ian Aylward, head of multi-manager research at Aviva Investors, said he was “optimistic” on European equities and had concentrated his bet on the region. “We [believe] that those regions that need to further increase central bank liquidity, such as Japan and Europe, will eventually do so,” he said.
“This will further boost the prices of many assets in these countries and prompt attractive European equity returns.”
Mr Aylward said he had sold out of Nick Williams’ Baring European Select fund because it had become “very highly correlated” with another holding, Alister Hibbert’s BlackRock European Dynamic fund.
He used the proceeds from the Barings sale to add to Mr Hibbert’s fund and Stephanie Butcher’s Invesco Perpetual European Equity Income fund.
Bambos Hambi, head of fund of funds management at Standard Life Investments, said his MyFolio range had increased exposure to Europe in June for the first time since it was launched four years ago.
The manager said he had been buoyed by commitments from the ECB to support the economy through a programme of buying corporate bonds.
“We believe that monetary policy in the region will continue to drive the euro currency lower, which would provide support for European earnings growth,” Mr Hambi said.
“With the level of earnings at depressed levels, even a small change from such a low base should translate positively for the equity market.
Paul Niven, head of multi-asset investing at F&C Investments, said he thought there were “some reasons for optimism which the market has yet to discount”.
He said Europe was offering better value than the US and “the debate is whether it offers sufficient value in order to compensate for risks and problems in the eurozone”.
These optimistic thoughts on Europe have to combat the increasingly negative newsflow.
The headline inflation rate is expected to drop to 0.3 per cent in November from 0.4 per cent in October, according to data released by official statistics body Eurostat on November 28.
Expected growth rates and inflation figures tumble in eurozone
While many managers remain bullish on the prospects for corporate profitability – and therefore returns from their investments – this optimism comes as the eurozone economy creaks under pressure.
The European Commission last month slashed the expected growth rates in the eurozone for 2015 to 1.1 per cent, compared with a prediction of 1.7 per cent just six months prior.
And the picture for inflation is not looking much rosier. Eurozone annual inflation is expected to be 0.3 per cent in November, down from 0.4 per cent in October, according to statistics body Eurostat.
Invesco Perpetual chief economist John Greenwood, said he did not think the European Central Bank (ECB) was doing enough to tackle low inflation.
“I forecast deflation for the eurozone a year and a half ago, and that was simply using rates of growth of money and credit,” he said.
“If I can do that, then the ECB can certainly do it, too. As there is huge opposition to the kind of measures needed, such as quantitative easing, the hands of president Mario Draghi are very much tied behind his back.
“However, that does not change the fact that the ECB needs to do more if deflation is to be avoided.”
Mr Greenwood said he suspected the opposition to such measures would “not fade away until Europe is actually in a situation of deflation”.