Global Investing

European equities finding some takers

European equities are getting some investor interest again.

As the ongoing debt crisis erodes consumer spending and corporate profits, the euro zone’s share  in investors’ equity portfolios has fallen in the past year –Reuters polls show holdings of euro zone stocks at 25 percent versus over 36 percent a year back.  Cash has fled instead to U.S. stocks, opening up a record valuation gap between the European and U.S. shares. (see graphics below from my colleague Scott Barber). In fact no other region has ever been considered as cheap as the euro zone is now,  a monthly survey by Bank of America/Merrill Lynch found in June.

That could offer investors a powerful incentive to return, especially as there are signs of serious efforts to tackle the crisis by deploying the euro zone’s rescue fund.

Pioneer Investments has moved to an overweight position on European stocks. While Pioneer’s head of global asset allocation research Monica Defend stresses the overweight is a small one compared to, say, its position in emerging markets, she says:

We are now more positive on Europe than we have been for a long time before.  From mid-June after the election in Greece and the EU summit we have become more constructive on European equities and now favour European equities to the U.S market…

Defend notes that European equities now boast average dividend yields of 4-5 percent, rising to 6-7 percent for high cash-flow generating firms — higher than other developed markets. She adds:

Research Radar: Greek gloom

Greek gloom dominates the start of the week as new elections there look inevitable and talk of Greek euro exit, or a Grexit” as common market parlance now has it, mounts. All risk assets and securities hinged on global growth have been hit, with China’s weekend reserve ratio easing doing little to offset gloomy data from world’s second biggest economy at the end of last week. World stocks are down heavily and emerging markets are underperforming; the euro has fallen to near 4-month lows below $1.29; safe haven core government debt is bid as euro peripheral debt yields in Italy and Spain push higher; and global growth bellwethers such as crude oil and the Australian dollar are down – the latter below parity against the US dollar for the first time in 5 months.

Financial research reports on Monday and over the weekend were just as gloomy, but plenty of interesting takes:

Bank of New York Mellon’s Simon Derrick’s view of the Greek political impasse concluded “there is at least an evens chance that the latter part of this summer will see what had officially been seen up until last November as an impossibility: a nation leaving the EUR.”

Three snapshots for Thursday

The European Central Bank kept interest rates on hold on Thursday.  President Mario Draghi urged euro zone governments to agree a growth strategy to go hand in hand with fiscal discipline, but as thousands of Spaniards protested in the streets he gave no sign the bank would do more to address people’s fears about the economy

The divergence between Euro zone countries is starting to impact analyst estimates for earnings. As this chart shows earnings forecasts for Spain and Portugal are seeing more downgrades than Germany or France.

The inflation rate in Turkey rose to 11.1% in April, putting pressure on the central bank to raise interest rates:

Three snapshots for Monday

The euro zone’s business slump deepened at a far faster pace than expected in April, suggesting the economy will stay in recession at least until the second half of the year. The euro zone’s manufacturing PMI came in below all forecasts from a Reuters poll of  economists, plumbing 46.0 in April – its lowest reading since June 2009. Weak PMI numbers are a bad sign for economic growth (see chart) but also for earnings:

Reuters reports that the Dutch government will resign on Monday in a crisis over budget cuts, spelling the end of a coalition which has strongly backed a European Union fiscal treaty and lectured Greece on getting its finances in order. As this overview shows the Dutch economy looks in better shape than many in the euro zone but is still finding austerity measures difficult to pass.

French President Nicolas Sarkozy appealed directly to far right voters on Monday with pledges to get tough on immigration and security, after a record showing in a first round election by the National Front made them potential kingmakers. See how the votes may transfer from 1st to 2nd round in this interactive calculator (click here).

Three snapshots for Friday

Although the focus has been on Spanish debt auctions this week as this chart shows Italy has much further to go in meeting this year’s funding needs.

German business sentiment rose unexpectedly for the fifth month in a row in March, moving in the opposite direction to the composite PMI:

Greg Harrison points out 82% of S&P 500 companies have beaten their Q1 earnings estimates so far. It  is early days but it it continues that would be the highest for at least five years. Is this a sign that the strength in corporate earnings in continuing? The chart below suggests as least part may be due to falling expectations coming into earnings season.

Three snapshots for Tuesday

The German ZEW economic sentiment index for March smashed expectations, coming in at 22.3 against the Reuters poll of 10.0.  Over the last couple of years the German 10 year Bund yield has tended to track the ZEW, however this has broken down with yields staying below 2% despite the rebound in economic sentiment.


Improving earnings momentum has been backing up the rally in equities with fewer analysts taking the hatchet to earnings forecasts. The chart below shows that the 3-month average revisions ratio (the number of earnings  upgrades minus downgrades as a percent of the total) looks to have turned back towards positive – especially in Europe.


Are emerging markets joining the dividend race?.   As this chart of Datastream equity indices shows, the payout ratio for emerging market equities is now above that of the US. Traditionally seen as a growth-based investment, is this another sign of emerging market equities moving closer into line with developed?

Becoming less negative on Europe

Markets are unimpressed today by Europe finally agreeing to bail out Greece for the second time, with European stocks down -0.6% on the day.

But here’s some encouraging news: Credit Suisse has become less negative on Continental European stocks for the first time in almost two years.

The bank has moved to benchmark weighting from 5% underweight for a currency hedged portfolio.

January in the rearview mirror

As January 2012 drifts into the rearview mirror as a bumper month for world markets, one way to capture the year so far is in pictures – thanks to Scott Barber and our graphics team.

The driving force behind the market surge was clearly the latest liquidity/monetary stimuli from the world’s central banks.

The ECB’s near half trillion euros of 3-year loans  has stabilised Europe’s ailing banks by flooding them with cheap cash for much lower quality collateral. In the process, it’s also opened up critical funding windows for the banks and allowed some reinvestment of the ECB loans into cash-strapped euro zone goverments. That in turn has seen most euro government borrowing rates fall. It’s also allowed other corporates to come to the capital markets and JP Morgan estimates that euro zone corporate bond sales in January totalled 46 billion euros, the same last year and split equally between financials and non-financials..

from Jeremy Gaunt:

Wishful thinking on earnings?

The U.S. earnings season is over bar a handful of firms. It has been robust to say the least: Thomson Reuters Proprietary Research calculates that S&P 500 companies overall had second-quarter earnings growth of 38.4 percent. That was 11 percentage points higher than people had been expecting heading into the season.

There may be more surprises ahead -- although which sort, remains in question. The research suggests that analysts still expect solid growth in the coming quarters and that the decline in U.S. economic strength over the summer has not changed their minds much.

Third-quarter earnings growth is estimated at 24.9 percent, down slightly from July estimates but higher than earlier in the year. Fourth-quarter estimates are at 31.8 percent.

from Jeremy Gaunt:

Micro versus macro

There is little doubt that the latest U.S. earnings season has been a good one for long-equity  investors. Thomson Reuters Proprietary Research calculates that with 67 percent of S&P 500 companies having reported, EPS growth -- both actual and that still forecast for those who have not filed yet -- has come in at 36 percent.

Furthermore, a large majority of the reports have surprised on the upside, as they like to say on Wall Street.  Some 75 percent of  reports have been better than expected.  Not surprisingly, the S&P index gained around 6.9 percent in July and is up another 1.7 percent in the first two trading days of August.

But given what looks like at least a faltering U.S. economy with little consumer confidence, some analysts  have begun asking what there is to get excited about. Philipp Baertschi, chief strategist at wealth manager Bank Sarasin, for example, calls it a case of micro bulls versus macro bears and warns that it won't last.