European equities win favour with US fund managers
Portfolio managers in the United States may not have bought European equities this week in the wake of Greece’s political turmoil, but they are surely considering when and how to take advantage of recent market corrections.
A number of managers AsianInvestor spoke to in Boston and New York said across asset classes, European equities are probably the most attractive.
In contrast, US equities are no longer attractive. Europe remains the only broad geography in which there is some value, said Robert Furdak, CIO at Numeric Investors in Boston, which runs quantitative strategies.
Managers point to flagging earnings growth among US companies, while Europe’s risk assets are being buoyed by the European Central Bank’s quantitative easing programme.
“There is better value overseas,” said Justin Bourgette, vice president of customised solutions at Eaton Vance Investment Managers in Boston. He said when the US Federal Reserve finally begins to raise interest rates, it will put additional pressure on corporate earnings at a time when margins are at historical highs.
“Price-to-earnings measurements such as the Schiller Index or Tobin’s Q Ratio all suggest US equities are overvalued,” he said.
The Shiller P/E ratio is based on average inflation-adjusted earnings from the previous 10 years. On Monday the index was at 26.56 points, well below its 1999 and 2007 peaks of 44 points each, but far above its historic mean of 16.61 points.
Tobin’s Q Ratio is the total price of the market divided by the replacement cost of all its companies. Currently it stands at 1.08 points, above its historic mean of 0.68 points.
George Musalli, CIO at PanAgora Asset Management in Boston, said earnings growth in the US has stalled because of the strong dollar: about half of revenues invoiced by S&P 500 companies are from overseas. Furthermore many US companies are exposed to the price of oil. Low oil prices hurt earnings among resource, energy and industrial companies. “So we see zero earnings improvement year on year for the S&P 500, but the market’s trading at an average p/e of 17 times.”
In contrast, he is keen on European stocks. “Europe is where the US was two or three years ago. There’s a lot more runway for their equity markets, at least in the short term.”
Because European stocks are being lifted both by a slow recovery across most eurozone economies plus the stimulus of QE, it is more of a momentum-driven market, and not one benefiting value investors, Musalli added.
“The cheaper euro and weak oil prices are also helping many stocks in Europe,” said Mike Roberge, president and CEO at MFS Investment Management in Boston.
Jimmy Chang, managing director at Rockefeller & Co. in New York, said he favoured domestically oriented stocks in Europe. The rise of the dollar has helped Europe’s exporters, but that benefit has already been priced into their stocks.
As for Greece, which on Sunday voted against accepting further austerity measures from European creditors, Chang said, “There are enough firewalls to contain it.”
It is a sentiment shared by other managers, although there has been modest fallout, with equity markets in Spain, Italy and France down so far this week.
But over the medium term, the market is moving toward a positive consensus on European stocks.
Sell-side analysts are also now favouring Europe en masse, according to data compiled by Numeric. Earnings estimates for Europe have risen sharply since December. The average analyst estimate then was bearish, suggesting a broad expected decline in European corporate earnings of 15%. However while the majority of sell-side analysts are still expecting negative earnings from Europe, the number is close to neutral. Meanwhile analysts began the year modestly bearish on US earnings, only to have increased downward revisions.