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To buy or not to buy Europe stocks is value hunters' dilemma
[LONDON] Europe's largest money managers are divided on whether to venture near the region's stocks after the biggest-ever slump made them a steal, going by history.
Amid concern that UK secession threatens Europe's political and economic stability, the Euro Stoxx 50 Index dropped 8.6 per cent on Friday, led by a record selloff in bank shares, while volatility jumped. That dragged Euro Stoxx 50 valuations to an almost four-year low versus a gauge of global stocks. The index lost 0.2 per cent at 8:53 am in London.
It's safe to say that after Friday, bulls are no longer expecting asset managers to flood the market with money even after hoarding the biggest cash piles in almost 15 years. While similar selloffs in the past have provided good entry points for the brave, wealth units at UBS Group AG, Lombard Odier, AXA SA and Zurich Insurance Group AG are among those saying this isn't the time for bargain shopping.
"Sit tight for now is what I'd recommend," said Caroline Simmons, the London-based deputy head of UK investment at UBS Wealth Management, which oversees about 32 billion pounds (S$59 billion).
"It will stay really volatile. There are a lot of risks that could come together. This was not the case in the euro crisis, Lehman, or the oil crash - whereas these events had wide financial-market implications, they didn't have as great a potential to create a longer-term domino effect politically."
Valuation has been part of the bull thesis on European equities since the financial crisis and, in isolation, Friday's selloff strengthened that case, particularly through the lens of dividends. The Euro Stoxx 50 has traded with almost twice the payout ratio of the S&P 500 and Friday's plunge pushed the rate up to 4.4 per cent, the highest level in three years.
Banks are also inexpensive relative to recent history. Looking at UK lenders, the 21 per cent decline in Lloyds Banking Group Plc pushed its price to 0.9 times book value, the lowest since 2013, while Barclays Plc's 18 per cent slump left it at less than half of assets minus liabilities. Overall, banks in the FTSE 350 Index are trading at 0.6 times book, roughly their lowest valuations since the aftermath of the financial crisis in 2009. The multiple for the Euro Stoxx Banks Index has fallen to 0.5 times book, the lowest since 2012.
Besides financial firms, some of the biggest losers in Friday's selloff were European telecommunications companies, with Telefonica SA and Telecom Italia SpA falling more than 16 per cent. Both now trade for less than 0.8 times sales, levels not seen since at least 2014. The full Euro Stoxx 50 fell below 1 times sales after spending most of last year above it, data compiled by Bloomberg show.
Europe's equity market is no stranger to selloffs such as the one that hit stocks Friday. Shares dropped 7.9 per cent on Oct 10, 2008, as policy makers failed to convince investors they could control the fallout from the collapse of Lehman Brothers Holdings Inc. The Euro Stoxx 50 reached an almost 13- year low five months later. While the investment bank's failure was followed by a six-year rebound, it saw significant interruptions in 2011 and then 2012 as Europe's debt-laden economies requested bailouts.
Lombard Odier's Bill Papadakis said he'll wait to see how world leaders react to the Brexit vote before calling the bottom of the market.
"A common policy response could help cap the downside," said the macro strategist at Lombard Odier, Geneva's oldest private bank. The firm manages about 224 billion Swiss francs (S$311 billion). "I would have to see signs before being confident about going forward. A sharp move downwards is guaranteed. I would monitor the situation closely before increasing risk." The response has been swift.
Bank of England Governor Mark Carney said Friday that the bank is ready to pump extra cash into the financial system, the European Central Bank said it will give lenders all the funding they require, and the Swiss National Bank waded into currency markets. German Chancellor Angela Merkel has invited French President Francois Hollande, Italian Prime Minister Matteo Renzi and European Union President Donald Tusk to Berlin on Monday.
The combined effort should contain further declines, said Vontobel Asset Management, which is scouring the market for bargains. Deutsche Bank AG's asset management unit sees the rout as a buying opportunity, according to chief investment officer Stefan Kreuzkamp, while Fidelity International's Paras Anand said that the UK's vote to leave the EU is not "catastrophic."
Pierre Mouton, who helps manage about US$9 billion at Notz Stucki & Cie in Geneva, already has his eye on British companies including Wolseley Plc, which sells about two-thirds of its building materials and bathroom supplies to the US and will benefit from a weaker pound.
"We should get some relief," Mr Mouton said by phone. "I would be surprised if we go down much further. I would be tempted to look at UK companies with large exposure to the US outside of the European Union that are falling." For Zurich Insurance's Guy Miller, it's the increased potential for further political shocks that's keeping him out of the fray.
"There's always a knee-jerk reaction, but this particular case is profound," said Mr Miller, a chief market strategist on Zurich's investment-management team. "Given the political landscape is changing, taking a bet on that is a risky move. Markets will stay volatile. You can get very badly caught out."