With low interest rates, equities deemed to give better return on investment
WITH paltry interest rates expected to linger on in the foreseeable future, returns from fixed income investments and money market funds will inevitably be in the low levels. And this is a phenomenon that many attest they have not observed in generations.
As one of the top asset managers in Europe, with assets under management worth 985 billion euros, Amundi Asset Management says it is positive on European equities this year, stating that it’s the ultimate source of performance in global portfolios.
Despite European equities seeing a three-month streak of net outflows now, with both active funds and exchange traded funds (ETFs) suffering large redemptions, the asset manager’s deputy global head of equities (head of investment specialists) Alexandre Drabowicz tells StarBizWeek that investing in equities is the way forward to capture the real source of capital growth over the longer term.
It’s the first time this has occurred since the second half of 2014 where outflows have grown larger by the month, reaching 8.5 billion euros in April, according to reports.
“Investing in firms and its shares ultimately are powerful source of performance for financial savings over the long term,” says Drabowicz.
While Amundi is overweight on equity markets and favours eurozone, Drabowicz notes the dividend yield of European equities globally (not tied to a specific sector) is around 4%.
When comparing this with the level of short-term rates, government rates or even corporate rates, it has never been so wide, he says.
“It is a unique scenario and opportunity that we are observing. The dividend yield of European equities is two times that of US equities.
“People think it’s risky investing in Europe because of its depressed growth, but one shouldn’t neglect the level of dividend income because some companies are actually making profits and distributing them to shareholders,” Drabowicz says.
Having said that although the asset manager opines US equities are at the end of a profit cycle, the situation is not so bad after all.
“But we are going into a plateau. Although earnings wise, European firms are lower than US, we think we can catch up. Hence, we are positive on European equities this year from an earnings point of view,” says Drabowicz, adding that although the market is dragged by the low interest rates and weakening euro, the low oil prices have inevitably aided domestic consumption.
Based on Amundi’s research, eurozone’s gross domestic product (GDP) has just returned to its 2007 levels and its long-term potential should be only half of what it was before the crisis.
Its cyclical recovery is slow and uneven, but should continue due to the ongoing monetary stimulus, less fiscal drag, low oil prices and gradual impact of structural reforms.
Taking all these factors into consideration on the backdrop of a sluggish economy, Amundi has engaged in reshaping its equity offerings in the past few years, as it believes in differentiating itself from the rest.
On the active equity part, Amundi has developed two kinds of portfolio, including the concentrated and conservative, but the key is diversification and ensuring that the portfolio is more resistant during a market downside.
“Mixing the portfolios will be more efficient in terms of risk profile.
“Retailers need to learn not put their money into one basket, but to diversify over time and see the returns,” he says.
The asset manager’s concentrated portfolio has smaller holdings covering 30 to 50 stocks, but the risk is relatively higher.
On the other hand, the conservative portfolio, which caters more for retail clients, focuses on stock selection and quality of the firms it invests in. Firms should possess healthy margins, high level of operating efficiency and a low level of leverage, explains Drabowicz.
Negative interest rates
He does not favour energy companies because they are bleeding money and are not profitable.
The financial institutions like banks are no better since they have revised their earnings 15% lower due to the combination of negative interest rates, litigation costs and added regulations.
Apart from IT firms, he likes diversified mid-cap companies such as those in the consumer-related businesses that own attractive profiles and deliver profit and good margins.
On emerging markets, Amundi is positive on India as it is not reliant on China’s growth, forecasting strong GDP growth of about 7% this year.
Meanwhile, commenting on Brexit (Britain’s exit from the European Union), Drabowicz thinks investors are prepared and have started to reduce their risk asset portfolio over the past weeks.
“We have seen 15 weeks of outflows in European equities over the last couple of weeks,” he says.
Reports indicate that for the majority of businesses, the break with the EU and the uncertainty associated with it would be bad for business and damaging to the UK economy, no doubt the EU would also feel the impact.
“Nonetheless, if Britain remains, I would expect to see a good summer for European equities.
“Perhaps when everyone is giving up and is out of the track, it would be a good time to buy,” he says.