Is it time Asians got over aversion to eurozone?
Eurozone equities have been trading at a discount to their long-term average for the past two years, so what is stirring optimism among fund houses that they can drum up retail investor interest in Asia?
According to Paul Doyle, head of European (ex-UK) equities at Threadneedle Investments, the pivotal turning point in the long-running crisis was action taken by the European Central Bank (ECB) this September.
That was when ECB president Mario Draghi launched the bond-purchase programme, or Outright Monetary Transactions, where the central bank pledges to buy potentially unlimited sums of short-term debt, with the aim of instilling confidence in the euro.
Fund flows into Europe have flourished since. Morningstar, the fund tracker, recorded $5 billion in net inflows into European large-cap equity funds in September, with a further $1.6 billion the following month. That stands in stark contrast to $4 billion in net outflows as recently as May.
Threadneedle CIO Mark Burgess says that at the very least it means no more nasty surprises are expected, although he admits that eurozone woes are far from over.
“Every day that goes past, the financial system is getting stronger and…the impact [the euro crisis] has on global markets dampens down,” he says. “Investors have got crisis-fatigue, so we have kind of got used to [the volatility].”
With this background in mind, the fund house argues that now is a good time to buy European equities, which have been trading at 10 times price-to-earnings or below for the past two years, a discount relative to the average 13 times multiple since 1980.
It also points out that Euro Stoxx 50 Price has risen almost 15% over the past year, compared with an 8% decline in the Shanghai Shenzhen CSI300 Index over the same period.
Dominic Rossi, global CIO for equities at Fidelity Worldwide Investment, says only selected multinationals such as Nestlé provide an attractive investment opportunity in Europe.
While they benefit from diversified income through their emerging markets presence, product categories and price points, they are also attractive because of dividend payouts; Fidelity expects earnings and dividend growth of 4-5% for such firms in 2013.
“With these strong multinational companies investors can be fairly confident that they will get their money back, and in the meantime they receive a higher income than they would from investing in sovereign bonds,” says Rossi.
But at the same time fund managers admit that European equities remain a difficult sell to Asian investors, given economic growth, systemic soundness and better capitalised banks in their own backyard.
“I think at a simple level, you’ll look at [Europe] and be very nervous about whether you should be investing there at all,” reflects Burgess. “You’ve got political and social instability to some extent, you’ve got [low GDP growth], and you’ve got an undercapitalised financial system.
“[But] you can find a number of global leaders – many of whom are very well-represented in Asia [and exposed to its growth].”
Simon Ng, head of wealth management and trust for RBC WM in Hong Kong, says he has yet to see a large number of Asian investors committing capital to Europe. “There is still volatility in the market.”
He suggests they are adopting a wait-and-see approach, "seeing how the crisis will evolve to get a bigger picture of what is going on. It doesn’t mean there isn’t any interest among clients, but if there is, the interest will be small,” Ng notes.
Andrew Hendry, Asia managing director for UK-based fund house M&G Investments, puts this reticence to invest in Europe down to a basic home bias.
“Asian [retail investors] will typically look at global allocation to equities – either global developed, global all-country or global EM. I have never seen a huge appetite going into European equities as a single regional asset class,” says Hendry.
“When they look at overseas, they look for a global fund or at the very most, a US fund, because that’s a large portion of the index. You would not see Asians going into a Germany fund, a France fund or UK equities fund.”