European fund selectors have fallen out of love with European equities over the last two years.
However, Belgian and Dutch fund buyers bucked this trend in Q2 and stand out in their enthusiasm for asset class, according to Last Word Research.
Last Word surveys hundreds of fund selectors across Europe every quarter and pan-European sentiment towards European equities deteriorated quarter-on-quarter from Q2 ’17 to Q1 ’19. Sentiment towards the asset class across Europe recovered a little in Q2, but sellers still outnumber buyers.
Pan-European fund selector sentiment towards European equities remains flat
Source: Last Word Research
Appetite for European equities has been dampened by a succession of disappointing datasets that show growth slowing, job creation fading, and manufacturing contracting.
Germany’s manufacturing sector underwent one of its most marked contractions since 2009, according to recent IHS Markit data, suggesting that Europe’s largest economy may be on the cusp of a recession.
These worries have encouraged outflows from European equities. During the first six months of this year, a whopping €55.5bn net flew out of European equity funds, according to Morningstar.
A contrarian view
Belgium is one of the few countries where buyers for European equities outnumbered sellers in Q2 and fund buyers have a preference for value over growth stocks, according to Last Word Research.
Sentiment towards European equities picks up among Belgian fund selectors
Source: Last Word Research
Tim Peeters, managing partner at Miles Ahead Investment Company in Antwerp, said that despite near-term concerns Europe’s underlying fundamentals remains solid and that the slump in sentiment towards European equities had creates some attractive long-term value opportunities, particularly in in the financial and automobile sectors. “We’re overweight on European equities,” Peeters said.
The automobile sector has been trading a low-multiples which made it an attractive long-term play, the Belgian fund selector added.
German car companies – such as Audi, Volkswagen and BMW – have been enduring a tricky period as they seek to reboot their business models away from petrol towards electric cars. But this shift is underway and at current levels they represent an attractive long-term value play. BMWs share price is currently trading at 8x earnings and Audi is trading at 9x earnings.
Holland’s largest lender ABN Amro, meanwhile, is currently trading at 8x earnings while France’s largest bank BNP Paribas is trading at 6.7x earnings. “Europe’s long-term prospects remain solid,” Peeters said.
European equities were the third most popular asset class among Belgian fund selectors in Q2 (up from ninth in the previous quarter)
Source: Last Word Research
Dutch fund selectors also expressed appetite for European equities in Q2, according to Last Word Research, with a slight preference for value over growth stock, and large cap over small cap.
Dutch sentiment towards European equities improved in Q2
Source: Last Word Research
Top performing European equity funds
The best performing large cap European equity funds this year to end-June are Kirao Infusion (+36.21); Deka Stoxx Europe Strong Growth 20 ETF (+35.82); Legg Mason European Uncons (+29.73); Fidelity Fast Europe (+29.67) and Threadneedle pan Europe focus (+29.37), according to Morningstar. All results are denominated in euros.
Leading European equity funds (Three year performance)
Among the top performers, Legg Mason’s European Unconstrained fund focuses on long-term capital appreciation. Its largest holdings include established European names such as Adidas (6.8%), Ferrari (6.6%) and Unilever (6.1%) and L’Oreal (4.2%). The fund was launched in November 2018.
Legg Mason Unconstrained fund vs category average (one year performance)
Fidelity Fast Europe is another fund that seeks to invest in European companies which it views as trading below their intrinsic value and whose long-term growth potential is mispriced by the market. The fund’s largest holdings include Experian (7.3%), software group SAP (6.4%) and Moet Hennessy Louis Vuitton (4.7%).
Threadneedle pan Europe focus fund, meanwhile, was launched in 2004. The fund primarily consists of equities of companies domiciled in Europe including the UK and its largest holdings include Aveva Group (4.8%), Edenred (4.8%) and Wolters Kluwer (4.7%) as well as Adidas (4.7%) and L’Oreal (4.7%).
