Brexit or not: fund managers prefer European stocks

Saturday, Jun 18, 2016

Dubai: Forget the chances of Brexit or the UK staying in the European Union, more and more fund managers are slowly increasing their exposure to companies in the Eurozone, an economy that witnessed two recession in a span of eight years.

The European Central Bank has pumped in record money through the quantitative easing (QE), about €80 billion (Dh331 billion, $91 billion) a month until March 2017, and the central bank has started pumping in money in corporate bonds.

“Quantitative easing has been a good and a proactive move from the ECB. The fund is set to benefit from positive development in the Eurozone economy,” Paul Morgan, Investment Manager in the Pan European Equity Team at Barings told Gulf News.

The QE has had material impact on the economy. The zone’s Gross Domestic Product (GDP) grew more than expected in the last quarter. Eurostat said that GDP rose to a seasonally adjusted 0.6 per cent, the highest rate for 12 months, from 0.5 per cent in the preceding quarter. There has been positive lending growth in excess of 9 per cent in Europe, and commercial loan growth has been more than 10 per cent since 3-4 years.

“Europe has travelled very far from being the sick child of the world to potential strength,” Dylan Ball, Executive Vice President, Portfolio Manager for the Templeton Global Equity Group, part of Franklin Templeton told Gulf News. Franklin Templeton expects a 12-14 per cent return from European equities.

Opportunities

According to fund managers, companies in the Eurozone, offer attractive valuations and dividend yields.

“Dividends yields are far more attractive compared to anywhere in the world also in terms of valuations,” Morgan said.

MSCI European equities index has a price to earnings ratio of 15 per cent, compared to the PE of 17 per cent for MSCI US index. The dividend yield stood at 3.5 per cent for MSCI Europe compared to 2.5 for MSCI world index. Triggered by these attractive features, Barings is looking to add exposure to insurance, consumer discretionary and also industrials.

“We see opportunities in the insurance stocks in Europe, and even the valuations are more attractive. Barings are finding opportunities in a few industrial names that may find solace from economic recovery in the Eurozone,” Morgan said.

At the same time, Barings would like to reduce exposure in consumer staples and health care firms, in which the asset manager has “massive” investments as they are defensive and pay relatively flat dividends.

“If we look at competing markets, by investing in an European fund you can gain exposure to global themes as well because most of these companies are internationally diversified,” Morgan said.

US rate hike

But European markets also need to be seen in context of a possibility of rising rates in the US. The US Federal Reserve is expected to hike rates for a second time in September amid sloppy growth in the world’s largest economy.

“If there is a rate hike in the US, which would be a lot earlier than the ECB, the euro would weaken against the dollar, and that would help the exporting companies in the Eurozone,” Morgan said.

Franklin Templeton has an underweight of 20 per cent on the North American market, though bullish on select stocks in the US.

“A second rate hike should serve as a short term boost to the cyclically oriented stocks like financials, due to bond yields, and rising net interest margins for banks and insurance companies, and higher oil prices, which would be play in our energy overweight as well,” Ball said.

At the end, everything boils down to stock selection, fund managers say.

“It always comes down to stock selection. If you do your homework, meet the management, and marry that with the valuations that you think these stocks should trade on, then you get it right more times than you get wrong,” Morgan said.

By Siddesh Suresh Mayenkar Senior Reporter