Affluent Asians seen shunning European stocks

The eurozone is tipped for its strongest economic growth in a decade next year, but the outlook is still clouded by political uncertainty going into 2018.
Affluent Asians seen shunning European stocks

Wealthy investors in Asia are largely shunning European stocks amid a continued swell of political uncertainty in that region, preferring opportunities elsewhere in the wolrd, wealth and investment specialists told AsianInvestor. This is despite the continent being set to post its strongest economic growth for a decade.

“Clients looking for returns can find better opportunities outside Europe,” said Harmen Overdijk, chief investment officer and founding partner of Hong Kong-based independent asset manager The Capital Company. “While Europe’s growth momentum will continue, investors don’t believe it will be strong enough to outperform other regions, such as the US or Asia.”

GDP growth in the eurozonewhich incorporates the 19 of the 28 countries in the European Union that use the eurois on track to grow at its fastest pace this year since 2007, with the consensus real growth forecast set at 2.2%, according to the European Commission. 

This comes after it increased by a seasonally adjusted 0.6% in the third quarter of 2017, marginally below the 0.7% growth June-ended quarter.

The pan-European Stoxx 600 is up 8% this year as of December 19—well short of the rise of 18% in the US's S&P 500 and 27% in the MSCI AC Asia Pacific index. 

“The eurozone has always been a harder sell [to Asian investors], given much lower headline economic growth rates, significant structural challenges and the occasional flaring up of political tensions,” Steve Brice, chief investment strategist at Standard Chartered, told AsianInvestor. 

Back out of favour

And if anything, such uncertainty is growing, after a temporary return to favour of European equities among Asian investors earlier in the second half of 2017.

Coalition talks to form a new government are stil ongoing in Germany, the biggest country in the EU, after months of discussion.

In Spain, a stand-off between Catalan regional authorities and the central government over secession continues to snowball. 

Also looming is Italy's general election, which must take place before May 20. It looks likely that none of the three main parties will win a majority, which would mean less momentum for pushing through much-needed economic reforms.

All this comes on top of the biggest political question in Europethat of how Brexit negotiations will play out and their impact on the rest of the continent. Despite a major breakthrough in the form of an agreed deal on December 8, there remain numerous issues to be ironed out before negotiations can start on a trade deal.

Unfamiliarity with Europe is another issue, noted Gabriel Chan, head of equity advisory for Asia at BNP Paribas Wealth Management in Hong Kong.

“Many investors don’t know much about European companies and their operations,” he told AsianInvestor. That said, with more education on the region, he noted, they become more willing to invest. 

Still, there have been flows generally into European equities in 2017 as investors bought into the bank’s views that growth would accelerate significantly while political risks would fall, Brice said. 

Europe has seen some $40 billion in net investment flows into equities this year, according to a November 24 report from Bank of America Merrill Lynch.

Selective play

Despite Asian investors' relatively low interest in European stocks, some allocation is likely to be included as part of an overall diversified portfolio for wealthy clients, noted the wholesale distribution head for Hong Kong and Singapore at a European asset manager, who did not wish to be named. She added that the exposure would be ex-UK due to client concern over that market.

More specifically, small-cap stocks look attractive, argued Aman Dhingra, head of advisory for Singapore at Swiss private bank UBP.

“In 2015, small-cap stocks were trading at a 15% premium to large-cap stocks; today, small caps are trading at a 10% discount,” Dhingra told AsianInvestor. He also heads the fund selection team for the private bank in Asia.

He suggested the best approach to European equities for 2018 would be a small and mid-cap fund that can capture relative value.

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