* Global investors’ love affair with Europe is in question…
Global Fund Managers’ allocation for Equities is at a multi-year high but intention to own European stocks on a 12m view has dropped to 13 month low (cover chart). Bullish sentiment towards European earnings is being pared back and valuations are no longer as supportive. Meanwhile European fund managers remain stubbornly overweight cyclical sectors. As macro data in Europe weakens higher quality assets in Europe continue to be supported until investor sentiment turns more defensive.
* … as outlook for European macro and earnings soften
European investors view on economic growth, inflation prospects and profit outlook all moderated over the month. Investor conviction on level of growth also weekend. Just a few months ago majority believed in doubled-digit earnings growth for European firms. Those expectations have reversed as net 33% do not expect ‘>10%’ EPS growth (sell-side analyst 12m fwd consensus EPS growth is at 11%).
* ... and valuations no more act as a supportive argument
Globally Equities are considered the most overvalued since May’00. However within regional equities, Europe is considered the most over-valued region after the US. The valuation perception for European stocks is at cycle highs and it no more offers a supportive argument to own European equities (Europe at 5yr highs - chart 2).
* But consensus is stubbornly bullish on cyclicals
Despite the weaker macro outlook, European investors remain OW cyclical sectors. Banks, Insurance, Industrials and Tech are at the top of preferences. On the flip side, Retail sector has by far the biggest underweight reading in over six years.