Change of tune for continental MPS picks; Are allocators too complacent over monetary policy?
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Europe's challengers
If European equities are coming back into fashion, they’re not yet at the stage where DFMs are fundamentally reconsidering their portfolio choices.
The average weighting to European equities in a balanced model portfolio is currently 5 per cent, according to our asset allocation database. That’s exactly the same as it was at the start of 2021, despite European benchmarks outstripping all other major regions year to date in local currency terms.
FX may play a part in that: in sterling terms, Europe is middle of the pack. Even that’s an improvement on recent years, but wealth managers’ European equity allocations are usually small enough to set and forget.
That said, there have been one or two notable changes to the pecking order in recent times. BlackRock European Dynamic remains at the top of the pile, but it’s been joined by Premier Miton European Opportunities. The latter fund has raced away since the market lows in March 2020, and more wealth managers have started to take notice.
Our data shows these two funds each account for one in every 10 European equity fund selections made by discretionary fund managers.
On the flipside, a mixed period of performance for Crux European Special Situations has meant it’s slipped down the rankings. There isn’t always a direct correlation between performance and popularity, however.
One fund starting to rise up the charts is Carmignac European Leaders, launched in 2019 and run by former Aviva Investors man Mark Denham. The fund had a tricky start to the year but has started to appear on a couple of buy-lists.
And some of the other mid-tier picks are also lagging benchmarks this year in particular, including those from Man GLG and Barings. As it stands, DFMs still have confidence in the enduring quality of their choices.
No more free lunch
We’ve spent some time this month discussing the potential pitfalls awaiting investors in the fourth quarter. But even if those doomy predictions do come true, many allocators think that the market’s automatic stabilisers will ensure things don’t get too bad.
If a growth surprise emerges, the thinking is the Federal Reserve will hold off on tapering, ensuring risk assets can resume their upwards path. That assumption is worth questioning, according to Citigroup macro strategist Matt King.
King puts the potential tapering process – which looks increasingly likely to start in November – in the context of global credit flows. On that front, he notes a gradual reduction in easing measures from central banks is “occurring at the same time as a much larger reduction in the flow of credit creation from the private sector”.
So while the overall flow of borrowing remains pretty high, the direction of travel is reversing course. And this direction is crucial: King says his team “cannot find any occasion when all the major components of the global credit impulse turned negative and there wasn’t a major sell-off somewhere.”
That suggests that the marginal impact of tapering might be bigger than if it were happening at a time when private sector activity was buoyant.
Set against this backdrop, offsetting an economic shock might require an increase in central bank purchases – which feels unlikely – rather than just an end to the decrease.
As Citi says, if ongoing QE and low real yields “are all you are relying on to prop up a bullish market view, we fear you may be in for a shock”.
Sooner rather than later
Tighter monetary policy is (theoretically) on the agenda in more places than the US. Today’s Bank of England policy meeting revealed that two members of the Monetary Policy Committee voted to end the bank’s bond-buying programme immediately.
As a result, investors are now expecting a UK rate rise within the next six months, and perhaps even this year.
The lesson of recent years is that events can often blow such intentions off course. Equally, raising rates is no longer a step into the unknown for the BoE, either. Allocators will hope tighter monetary policy will prove a nice problem to have, rather than arriving at a time when inflation is rising but growth is slowing.
