JP Morgan Portfolio manager Nadia Grant has boosted her European overweight as a pair trade against emerging markets, supported by signs that the European economy is stabilising while valuations also look supportive.
The recent move in the £56.9m fettered fund comes as part of a larger pair trade towards the end of last year, explains Grant, whereby the fund began to favour the US, Japan and Europe at the same time as going underweight emerging markets.
Leading indicators showing signs of an upturn in the European economy after hitting bottom is enough of a reason to be constructive on the region when combined with European Central Bank president Mario Draghi’s policy backstop, says Grant.
She says: “When you start looking at leading indicators, finally we have seen them bottoming and now they are actually turning.
“This was happening back in March 2009 in the US, so you don’t have to see indicators necessarily being positive or above zero to get excited, the market is anticipating this. You just need to see the signs of stabilisation and this reversal.”
Grant goes onto argue that Europe should benefit as a cyclical play on the global recovery and the growth currently seen in the US economy.
Europe appears attractive when compared to emerging markets when looking at valuations, dividend and corporate governance in the region, adds Grant.
She says: “Valuations are very supportive and cheaper versus emerging markets. Also you are on almost 4 per cent dividend yield in Europe and you have better corporate governance in the region too.”
European stocks with exposure to emerging markets have also faired worse than domestic European names in the first and second quarter of this year, according to Grant.
“This has been a reversal of what has happened over the last ten years where we saw that massive boom in emerging markets which impacted those European companies with significant exposure there,” the manager adds.
“However at the moment this is not the case as emerging market equities market equities are down year to date, mainly because of the growth scares in China.”
Grant says the fund is “finding better places than emerging markets in terms of relative value” to put money to work. She says: “The US is obviously the safe place and the main story. However we have also played Japan and we have recently been adding to Europe.”