European and UK equities top picks for advisers in 2015

The appetite for European and UK equities has risen sharply since the start of the year despite geopolitical concerns, experts say.

According to the latest Baring Asset Management Investment survey, 86 per cent of respondents said they were either ‘very’ or ‘quite’ favourable towards European equities as an investment opportunity. This is up from 53 per cent in the first quarter of 2015.

The survey conducted among 108 investment professionals between May and June 2015 also found strong appetite towards UK equities, with 91 per cent of respondents saying they were either ‘very’ or ‘quite’ favourable on the asset class, up from 79 per cent in the first quarter of the year.

This is a sharp turnaround from the start of the year, when retail investors were pulling money from UK equities at a pace not seen since 2006. The Private Investor Watch from Capita Asset Services found that between September and November last year small investors sold out of £9.1bn of shares.

Yellowtail Financial Planning managing director Dennis Hall says this turnaround is “not surprising” as it could have been predicted by looking at how the stockmarket has performed this year.

He says: “The market started off at a low point and has generally climbed since. It’s been a bumpy ride, and some of the gains have been given up, but generally the market has been able to brush off the bad news of China or a possible Grexit.”

A fall in prices from the peak of the UK markets this year mean more pricing is more reasonable for investors to access the space, says Hargreaves Landsdown senior analyst Laith Khalaf. “The UK stockmarket has fallen around 5 per cent from the highs it reached earlier this year, so it is natural to see that advisers are more positive seeing as you can now get in at a better price.

“We have also seen some measure of agreement in Europe on Greece, which explains the boost in confidence in European equities. In the end this might simply be kicking the can down the road, but at least this one was a good punt.” 

Old Mutual Global Investor multi-manager head John Ventre, however, thinks European equities have had the edge over UK equities in the past few months. 

Ventre, who is 3 per cent overweight Europe in his £622m New Spectrum 5 fund, says Europe is a “better risk to take” and will continue to be a good trend to follow in the coming months. 

“The outlook for UK equities is a bit different. We have some structural headwinds especially for the strong exposure the UK indices have to commodities,” he says.

With earnings season approaching, the Eurozone is likely to outperform the US in earnings growth this year, predicts NN Investment Partners, the asset manager formerly known as ING Investment Management. 

“This is because of an improving macro backdrop, whereby the peripheral countries will do particularly well; the positive impact of the weakening Euro; and the high operational leverage that will allow margins, which have not recovered at all, to improve,” says Patrick Moonen, senior strategist for multi-asset at NN Investment Partners.

“The weakness of the labour market should limit any wage increases that are not matched by productivity improvement. As a result, 2015 will be the first year since 2007 that Eurozone earnings will outgrow those of the US.”

In sharp contrast to the positive sentiment to equities, Baring’s survey found that interest towards fixed income and cash has fallen significantly, with more than half of IFAs saying that their clients should decrease exposure to these asset classes. 

Hall adds: “In any event, the outlook for fixed interest is very bearish, with interest rates set to rise the only way for bonds is down. Cash still continues to offer poor returns, even if interest rates increased, the real rate of return is likely to be negative.

“If you had to choose the asset class that would give the best return in the coming months, equities beat fixed interest.”

The prospect of interest rate rises in the UK and the US are hitting fixed income’s appeal, says Khalaf.

“The fixed interest market looks like an area to avoid with rate hikes creeping nearer in the US and UK. Bonds have surprised and confounded investors by continuing on their strong run since 2009, so don’t exclude the chance of them doing it again.”