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US investors more willing to place wagers on uncertain Europe
[NEW YORK] A spate of elections this year that threaten to change Europe's course and rattle the continent's largest political bloc and currency is normally the sort of uncertainty that scares away international investors.
Instead, deep-pocketed investors are buying into the continent's stocks - and trimming their stakes in the United States, where stock markets have been at record levels - in the hope some bargain shopping will pay off.
The 2017 calendar is marked with a series of European elections in big countries that have put markets on the edge, including a March vote in the Netherlands, a two-round French presidential election that starts in April and a September German poll that Chancellor Angela Merkel has called her"toughest" test ever.
In each case - and in a possible Italian vote that could be called by June - voters will likely have the opportunity to voice support for anti-European Union or anti-euro candidates who are seen as increasingly credible in the aftermath of the shocking June British "Brexit" vote to quit the European Union and the election of US President Donald Trump.
"We're not bearish on US stocks, it's just more of a preference of where we'd rather be," said Kevin Lyons, a senior investment manager at Aberdeen Asset Management PLC, noting that since late last year, his team has boosted its bet on European stocks.
Aberdeen is not alone.
Fund managers increased their exposure to the Eurozone in January more than any other investment category, according to a survey conducted last month by Bank of America Corp of 176 institutions that manage US$455 billion in assets.
BlackRock Inc, which manages US$5.1 trillion overall, has been scaling up its exposure to European stocks in several funds over the past few months, according to research service Morningstar Inc.
On Monday, BlackRock officially raised its outlook on European stocks to the highest possible rating for the first time since last May, saying the risks are overblown.
By contrast, the asset manager is neutral on US stocks.
"It's far from consensus," said Richard Turnill, BlackRock's global chief investment strategist, noting that the United States is growing but most investors already know that. "What drives markets is surprise, and expectations for Europe are just very low," he added.
Growth, inflation and analyst forecasts for corporate profits have picked up in Europe in the last year, but so too has the prospect for a stronger currency and the withdrawal of historic support from the European Central Bank's bond-buying programme, called quantitative easing.
Earnings would have to move higher to support a positive view, Wells Fargo & Co's Investment Institute said in a note on Wednesday.
Yet a score of measures, including the widely used price-to-earnings ratio, suggest investors might be rewarded for a taking a risk now.
That ratio for the US stock market is 17.67, following a long bull market since the financial crisis, compared with 14.01 for a group of European shares excluding Britain.
The difference between the valuation ratios is wider than normal, ranking in the top 78th percentile, according to an analysis of monthly Thomson Reuters data stretching back 20 years.
Investors are taking notice. US-based European stock funds attracted US$709 million in January, their first inflows in a full year and the end of the funds' longest drought on record.
By contrast, investors pulled US$1.7 billion from domestic stock funds in the United States last month, according to Thomson Reuters Lipper, a research service.
That said, US stock exchange-traded funds pulled in US$15.3 billion during the latest week. But those funds are seen as representing quick, tactical shifts, rather than strategic bets, in part because ETF users include hedge funds and other institutional investors.
"It may be we're close to a short-term peak in political risk across Europe," said Mr Turnill. "For the first time in several years, I think we're seeing a change." He said value is just one component too his faith in the Europe trade.
Global growth policies are likely to pump up European companies more than other developed markets because companies there are more exposed to cyclical regions, such as the emerging markets, and because European earnings are lower on average, giving each increase in revenue a relatively bigger impact on profits, according to Mr Turnill.