London: More European wealth managers have turned pessimistic on the region’s stocks, taking the view that this year’s rally is likely to falter while markets in the United States and developing countries power ahead.
Just seven out of 22 European private banks and wealth managers surveyed by Bloomberg are “overweight” the region’s stocks, with 11 “neutral” and four “underweight”.
This marks a dip in sentiment from the start of the year, when 10 respondents were positive on the region and only one negative.
Their caution comes despite a strong run: The Stoxx Europe 600 Index has racked up five straight monthly advances, and has returned 13% this year.
The region’s companies have delivered better-than-expected results and industrial data is improving.
Sceptics, though, say much of that good news is priced in, while higher bond yields, strength in the euro and geopolitical risks limit the case for adding to European stock holdings.
“Our inclination would be to reduce exposure in the coming weeks, as we think Europe is likely to disappoint economically and expect investors to take profits rather than commit more capital to the region,” said Julien Lafargue, chief market strategist at Barclays Private Bank and Wealth Management.
The region’s valuations are still cheap relative to US peers, though less so against their own history.
The Stoxx 600 index trades at about 14.8 times forward earnings, above its 20-year average of 13.4 times.
In the meantime, the S&P 500 is priced at 19.5 times.
For many, Europe still falls short of the United States, emerging markets and Japan on the overall mix of earnings strength, valuations and exposure to artificial intelligence (AI).
Analysts expect earnings at Stoxx Europe 600 companies to rise 15% this year compared with a 27% surge forecast for S&P 500 members, according to data compiled by Bloomberg Intelligence.
“Following such a pronounced rally, future returns are likely to depend more on earnings growth than expanding valuations,” said Daniele Antonucci, head of investment and chief strategist at Quintet Private Bank.
He added that this makes potential gains “somewhat less compelling”.
Geopolitical risks continue to dampen the outlook.
While oil and gas prices have retreated from this year’s peaks, the Strait of Hormuz remains contested, clouding sentiment.
Closer to home, politics are also back in the spotlight, with next year’s presidential elections already starting to weigh on French shares.
“The region remains highly exposed to geopolitical risks,” said Philipp Lisibach, chief investment officer for Europe at LGT Private Banking, who also pointed to elevated energy prices.
“We believe current euro-area valuations do not adequately reflect these concerns.”
Investors are also paying closer attention to bond risks after long-dated Treasury yields climbed near two-decade highs in mid-August.
“At this point when we discuss the level of yields, I don’t want to be too bullish,” said Christian Nolting, Deutsche Bank AG’s global chief investment officer for private banking.
Investors are becoming increasingly selective about which countries, sectors and stocks they own.
BNP Paribas Wealth Management favours a greater tilt toward value sectors such as banks, especially as they provide a counterweight to the AI trade.
“This reflects our call to diversify out of tech-led growth into value segments, regions and sectors,” said Edmund Shing, the French lender’s global chief investment officer.
A softer dollar also favours developing economies, while hurting European exporters that rely on overseas sales.
“When the dollar weakens, it is really emerging markets that is a better place to allocate money,” said Jerome van der Bruggen, chief market strategist at Indosuez Wealth Management.
Still, a handful of wealth managers have turned more bullish in recent weeks.
UBS Global Wealth Management upgraded European stocks to attractive from neutral in mid-July, when it forecast earnings growth of close to 25% over the following two years.
Another reason for optimism is Europe’s shift to fiscal stimulus, led by Germany‘s €500bil (US$582bil) spending plan.
Christina Carlsten, a senior fund manager at Banque Piguet Galland, is overweight the region and sees such programmes as a “game changer”.
“Earnings are progressing again after three years of stagnation and we believe that this will continue,” she said.
Notably, the ability of European shares to win over more bulls will hinge on how strong and broad future profits will be.
Some argued that second-quarter results were driven mainly by financials and energy, something that needs to change to build a stronger case for the region.
An easing of tensions between Iran and the United States and resulting drop in energy prices would provide another reason to turn more upbeat on Europe.
“If we find a solution to the energy issue in the Middle East, that could be rather positive for sectors like industrials for example, maybe even the consumer sector, which in Europe didn’t do so well this year,” Deutsche Bank’s Nolting said. — Bloomberg
