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Europe: In or out?
As we've shown, plenty of wealth managers are joining the exodus. But asset allocators' love of a contrarian opportunity, coupled with the fact that plenty of other regions have problems of their own, means things are never quite so clear-cut as all that.
As with Japan, Europe's relative value has meant interest still lingers. Nic Spicer, UK head of research for PortfolioMetrix, whose firm has a small underweight, says the wealth manager's interest is driven more by attractive valuations versus the likes of the US than any particular zeal:
It hasn’t been a case of ‘We love Europe’. We are fairly cognisant that there’s a lot going on across the continent. [But] Europe is attractive in terms of equities and also the underlying currency.
Others look equally torn. The average Balanced portfolio, as measured by our MPS tracker, has 5.6 per cent in Europe. But that masks plenty of dispersion, as seen in the chart below:
While plenty hover somewhere around 5 per cent, there are two portfolios that have no exposure, and two others reaching into double-digit levels. What’s interesting is firms on both sides of the debate have been changing tack.
Recent turbulence has led Hawksmoor to dip back in, as we've previously reported. But others have gone the other way.
Here’s Steve Cohen, investment analyst at Lumin Wealth, a firm which had double-digit European equity exposure late last year:
Although previously positive, we have been reducing our European exposure due to the sharp reversal in fortunes on economic data across the region.
His concerns are multi-faceted, from Germany’s slowdown to French politics, Italian banks, Brexit and the challenges facing both the EU and ECB. Whoever proves to be right on the issue, it's another dividing line between DFMs at a time when consensus is falling away.
Goat or monkey
One subject even more divisive than Europe is China. True, the hard landing/soft landing talk of yesteryear has gradually been abandoned - but while China bulls may view that as a victory, a consensus isn’t exactly in sight.
In the year of the pig, it's the trade war that's now the focal point of investor concerns, even if sentiment on emerging markets has improved markedly of late. It's put new stresses on the Chinese economy, though that does mean hopes are rising that Beijing might be embarking on a new fiscal stimulus. That in turn would give the global economy a helping hand at a time of slowing growth, much as it did in 2016.
But it’s the events of 2015 that may ultimately have more relevance for markets. Schroders’ Robin Parbrook, DFMs’ go-to manager in Asia Pacific, told a Winterflood conference last month that the renminbi’s link to the US dollar is “unsustainable on a five-year view”.
It brings to mind Beijing’s devaluation of the currency in August 2015; an event that had serious consequences for investors of all stripes.
In the short-term, all is well. Optimism over trade talks means Asian stocks - China’s in particular - are on the rise, and the renminbi isn’t yet retesting the 7 mark against the dollar. That’s all helping fuel the more positive approach to EM adopted by investors this year.
But here, too, Mr Parbrook isn’t exactly enthusiastic. He thinks Asian and EM equities, on the whole, are closer to fair value than cheap - another parallel with 2015. The manager’s caution has served him well over the past few years, even as the biggest risks surrounding the Chinese economy haven’t come to pass. But for the funds industry in gen, it’s not yet clear whether the coming months will look more like 2015’s year of the goat or 2016’s year of the monkey.
New data shows asset management M&A broke records last year, a total of 253 deals surpassing the previous high set in 2007. Instinctively, that feels right: mergers and acquisitions are a fact of life for the industry nowadays.
So it’s worth noting that not that many of those deals took place in the UK. Over here, much of last year’s activity centred on wealth managers themselves, and different kind of tie-ups like Schroders and Lloyds’ new venture. Hermes has new owners, but there was little else to rival the likes of Standard Life Aberdeen or Janus Henderson.
Instead, long-rumoured takeover targets remain stubbornly independent, and plenty of strugglers still sit slightly forlornly in the shop window. If the drivers of merger and acquisition activity are as powerful as most suspect, that stasis surely can’t continue much past March 29.