No place like home for investors

Euro-zone fund managers have confidence in the region, writes Jeremy Gaunt

Despite a lagging economy, worries about the strong euro and budget strictures that restrain government spending, euro-zone investors are keeping faith with their region, placing bets on rising local equities.

Leading euro-zone investors said in a series of interviews that they were bullish on the region, focusing assets on what they see as relatively cheap shares that will bring solid returns as the economy catches up.

The stance contrasts with the view of many non-euro-zone firms - in Britain and the US, for example - that see Europe as a regional laggard and the least likely to outperform among the major regional equity markets.

"Human nature makes you tend to view your home arena more favourably," said one industry analyst, seeking to explain the discrepancy.

Typical of the euro-zone view is that of Germany's biggest fund manager, DWS, which manages around €115 billion in retail assets in Europe. It is overweight on euro-zone equities, expecting an economic rebound next year.

"There is a huge gap built up from \ under-consumption... At some time, that has to go into the market again," according to DWS senior fund manager Mr Michael Sieghart.

In a similar vein, Spain's Santander Central Hispano Asset Management, with €55 billion under management, is more positive about euro-zone stocks than other regions, in part because it has an upbeat macroeconomic forecast.

"We are positive on equities as an asset class and particularly positive on European equities versus the US and Japan," Mr Javier de Mazarredo, the Madrid-based asset manager's head of equities, said.

The US economy has picked up for much of this year, driving stock indices such as the S&P 500 up by as much as 30 per cent since a mid-March low.

By contrast, the euro-zone economy has been in the mire, with Germany, Italy and the Netherlands slipping into recession in the first half of the year and France just missing it.

But European stocks have also gained around 30 per cent, as judged by the FTSE Eurotop 300, lifted by the view that the US economy will lead the world to recovery.

Euro-zone fund strategists base their bullish view on a couple of basic themes.

First, they see the euro-zone economy as simply lagging the rest of the world and expect it to catch up during next year.

Axa Investment Managers, the French firm that manages €278 billion, is not only overweight on euro-zone equities overall, it has lifted its exposure in the basic resources sector, which will benefit from a cyclical upturn.

Mr Franz Wenzel, a senior investment strategist for Axa in Paris, estimates that the euro zone will grow by 1.7 per cent next year - fairly meagre, but quite solid compared with this year's 0.5 per cent.

"The main driver is going to be business investment... which we expect to grow substantially," he said.

Also, euro-zone equities are seen as relatively cheap compared with US and other counterparts and, accordingly, most likely to bring returns.

"With an expected return of roughly 13 per cent over the next 12 months, euroland equities are by far the most attractive asset irrespective of the investors' regional focus," Italy's Generali Group Asset Management said in its October outlook.

In contrast to this bullishness, many non-euro zone investors hold the region in little regard.

It is often portrayed as hamstrung by structural inefficiencies, a central bank more concerned with fighting inflation than promoting growth and budget rules that stop countries from pump-priming their economies with spending programmes.

The recent rise in the euro, currently near all-time highs against the dollar, is also seen as hitting exports and restraining growth.

Britain's Standard Life Investments, for example, has only light exposure to euro-zone equities because of the euro's appreciation and poor economic news from the region.

US fund giant Putnam, meanwhile, notes the run-up in euro-zone stocks has come against a background of sluggish growth.

"We are underweight on continental Europe... based on unattractive valuations, a strengthening euro, and stubbornly tight monetary policy," Mr Jeff Knight, chief investment officer on the global asset allocation team, said.

But, it is not only the non-locals who question what appears to be the consensus among euro-zone investors.

Dutch-Belgian firm Fortis Investments, with €76.2 billion under management, sees little hope of any immediate economic rebound and has deepened its six-month long underweight stance on European equities.

"We have moved even more underweight on Europe because of the poor economic momentum in the region compared to the US, Asia and Japan," according to Mr Emiel van den Heiligenberg, head of global asset allocation at Fortis. - (Reuters)