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No more Euroboom? No problem, say investors
[LONDON] Signs of fading growth momentum across Europe have come as bad news to equity investors hoping for a repeat of 2017's bumper returns, but many say they're not ready to throw in the towel yet on companies that are still delivering strong earnings.
European equities were in high favour last year. The region had overcome the 2012 sovereign debt crisis and was finally seeing an economic boom - complete with its own hashtag, #Euroboom.
Some of that enthusiasm has waned since. European stocks still failed to match Wall Street gains, rising just 1.3 per cent this year, after surging 10 per cent in 2017.
More ominously, a string of economic data has raised doubts that corporate profits will keep rising. That has knocked the index 4.2 per cent off January highs and some US$19 billion has fled euro equity funds in the past seven weeks, data from EPFR shows.
Funds' allocations to euro zone equities dropped to a 13-month low in April, according to Bank of America Merrill Lynch, which says "overweight" positions have slipped to 34 per cent versus 58 per cent last October.
Kevin Gardiner, global investment strategist at Rothschild Wealth Management, is among those disillusioned with the market.
"If Europe didn't do well last year, when is it going to perform?" said Mr Gardiner, who recommends neutral positioning on continental Europe.
His disappointment is perhaps understandable.
After picking up strongly most of last year, IHS Markit's flash PMI survey - a key euro zone manufacturing activity gauge - dropped to 14-month lows of 55.2.
Business confidence in Germany, the bloc's growth engine, fell this month to the lowest in over a year .
In a sign analysts were unprepared for such a slowdown, Citi's economic surprise indicator for the euro zone has fallen to its lowest since June 2012.
If data due on Wednesday shows first-quarter economic growth decelerating significantly from the previous three months, that could be a crucial negative signal for the market, bears say.
KEEPING THE KETTLE ON THE BOIL
Not so fast.
Some investors are sticking to their guns - they say economic indicators' decline from the supercharged levels of last year was to be expected.
"It was kind of too good to be true in that you had PMIs in Europe near 60, which was great and you were thrilled with it and you would take it but ... you just didn't really feel all that comfortable with it," said Daniel Morris, senior investment strategist at BNP Paribas Asset Management.
"The higher you go the further you fall, so I think it's made the decline since seem worse than in fact it really is,"said Morris, who remains "overweight" on Europe.
Another investor, Chris Dyer, director of global equity at Eaton Vance, is keeping European equities as his largest"overweight" within global portfolios, noting that the indicators had hit multi-decade highs last year.
"It's hard to keep the kettle on the boil for that long, so I'm not too concerned about it coming off," Mr Dyer said.
The reason for clinging on, investors say, is their belief that regional companies will still deliver robust profits.
In 2017, European firms enjoyed their first year of earnings growth in seven years and MSCI Europe should deliver earnings growth of 7.5 per cent this year, according to Thomson Reuters I/B/E/S.
This pales in comparison with the 19.8 per cent predicted for the S&P 500, but US earnings are widely seen as boosted by hefty tax cuts.
In the first quarter, MSCI Europe earnings are expected to grow 0.6 per cent from Q1 2017 in euro terms - which translates to a healthy 12.1 per cent in dollar terms, as the euro appreciated sharply in the first quarter.
Finally, the euro zone's newfound political stability is also reassuring investors, after populist, eurosceptic parties largely failed to make much headway.
The best example of that optimism may be Italy. Italian stocks are among the best performers globally, gaining 9.7 per cent year-to-date, led by banking stocks that are well positioned to benefit from growth. That's despite the likelihood of fresh elections after an inconclusive vote in March.
"The fact that Europe is on a sounder footing and that growth seems to be relatively well-underpinned ... we're pretty comfortable with that," said Alistair Wittet, manager of the Comgest Growth Europe ex UK fund.