With €100bn having been pulled from European equities last year, it seems that investor disenchantment with Europe continues. Yet are investors in danger of falling out with Europe just when things take a turn for the better?
Economic data has been positive for some time, but this is now beginning to feed into a better earnings picture. Sales have surprised positively for the companies that have reported Q4 earnings, disproportionately benefiting cyclical stocks. Fixed costs mean cyclicals gain disproportionately from an upswing in growth, as most of the benefit of each extra unit sold feeds through to the bottom line.
The fact that analysts have been surprised by European companies reporting better numbers on stronger growth, speaks to the ingrained pessimism around Europe. Despite expectations for a decline in earnings, the numbers, so far, have actually been positive.
Financials have benefited from stronger loans growth and higher bond yields while industrials could be seeing the beginning of a pick-up in demand for capital goods, as companies step back from their reticence to invest since the financial crisis.
However, sentiment may now be turning. The BofAML Fund Manager Survey showed fund managers moving overweight eurozone equities in December, from a small underweight position the month before. With political risks still concerning some, this could simply be the result of many closing underweights, leaving plenty of additional capital yet to flow into Europe.
Technical measures also suggest that European equities have further to go. Momentum stocks have become higher beta in recent months, with momentum traders favouring cyclicals. Recent cyclical performance could therefore continue, with European stocks experiencing an opportunity akin to 2013 and 2015, when markets rallied strongly on the momentum of cyclicals.
So, European economics and earnings are improving, technical measures offer support and investor sentiment could still be behind the curve. If you’re prepared to take the political risk, there really isn’t much of a reason not to like Europe.
Bill McQuaker is multi asset portfolio manager at Fidelity International.