By Jon Sindreu
As politics spook European markets, some large fund managers are
buying battered stocks and bonds in a bet that worries about rising
populist movements are overblown.
Europe's political calendar is staked with votes that could
result in antiestablishment upsets. A referendum in Italy on Sunday
could topple a reformist government. Next year, the Netherlands,
France and Germany all face elections in which euroskeptic parties
could post gains that some investors say may hurt economic growth
and threaten the euro's very existence.
Polls mostly predict the status quo will prevail. But, burned by
misleading polls on the U.S. election and Brexit, many investors
don't want to take a chance. Through Wednesday, the Euro Stoxx 50
equity index is down 6.6% since the start of year, compared with a
7.6% rise in the S&P 500. Eurozone bonds have sold off in the
last month.
But some money managers see an opportunity. If political fears
are overstated, now is a chance to buy on the cheap, they say.
Their wager gets to the heart of an age-old debate: Just how
critical are political developments to global markets?
Not very much, said Vincent Mortier, deputy chief investment
officer at Amundi, Europe's largest asset manager with EUR1.1
trillion in assets. Amundi holds more European assets, especially
equities and real estate, than allocated by benchmarks.
"Eurozone assets have been under too much pressure by
non-European investors--U.S. investors in particular--which
presents some opportunities," Mr. Mortier said.
Shares of companies in the Euro Stoxx 50 are trading at less
than 16 times their earnings over the last year, compared with 20
for the S&P 500. In Italy they are even cheaper. Shares on the
FTSE MIB are trading at 13 times their earnings.
So some investors are starting to poke around for bargains.
This year, European equity funds have suffered a net outflow of
$97 billion, data from EPFR Global shows. But the most recent data
shows two weeks of consecutive inflows for the first time since
February.
Stephanie Butcher, a manager of European equity funds at Invesco
Ltd., has bought Italian stocks in those sectors she thinks have
been unfairly punished. Those include energy, infrastructure and
even banks. Shares of Italian banks are down 50% since the start of
the year, compared with an average decline of 7% for banks across
the eurozone.
"They have been impacted simply because they are Italian," said
Ms. Butcher, whose company has $808 billion under management. "One
has to come to the conclusion there's a discount there."
Many other investors argue European stocks and bonds are cheap
for a reason. Underlying their jitters are the eurozone's complex
politics and a recurring fear that the existence of the single
currency is under threat.
While it remains unclear how a country could leave the eurozone,
investors are once again concerned about the possibility of an
attempt, said Neil Dwane, fund manager at German asset manager
Allianz Global Investors, which handles $541 billion. In recent
years, worries have flared that a financially struggling Greece
would be forced to exit the currency union.
Spreads between Italian and French 10-year government bonds and
those issued by Germany, the region's economic powerhouse, are at
two-year highs, in one sign of investors' concerns. On Wednesday,
the yield on Italy's 10-year bond was 1.97%, compared with 0.26% on
comparable German debt.
"If you end up with very stark political divergence at the
center of Europe, it definitely starts to rip itself up at the
seams," said Mark Dowding co-head of investment-grade debt at
London-based BlueBay Asset Management, who is taking a cautious
stance on eurozone bonds.
The next big political test for markets comes on Sunday, when
polls suggest that Italians will reject a proposed constitutional
reform that threatens to derail Prime Minister Matteo Renzi's
efforts to nurse Italy's beleaguered banks back to health.
A defeat could lead to Mr. Renzi's resignation and a boost for
the country's populist 5 Star Movement.
Polls have consistently underestimated the strength of
antiestablishment movements in recent elections. They were wrong in
their predictions that the U.K. would vote to remain in the
European Union and that Donald Trump would lose the U.S.
presidential election.
As a result, investors are taking little comfort from polls
showing that euroskeptic candidate Marine Le Pen is trailing in the
French presidential race set for April 23 and that the populist
Alternative for Germany is in third place ahead of a German general
election expected around September.
Analysts who predicted market mayhem in the event of populist
victories were also off the mark. That means European
markets--especially stocks--have a bigger chance of bouncing than
plunging, some investors argue. Even if they win, euroskeptics are
likely to water down their plans to make them more
investor-friendly, these money managers say.
"If at some point we are relieved from political pressure, this
would definitely trigger a relief rally in Europe," said Vincent
Juvyns, fund manager at J.P. Morgan Asset Management.
At the core of such optimism is the belief that the economy,
which is showing signs of a recovery, is more important for markets
than politics are. The eurozone economy expanded in November at the
fastest pace so far this year, according to IHS Markit. Official
figures released this week confirmed that gross domestic product
returned to growth in both Italy and France in the third quarter,
while Italian unemployment ticked down in October.
"Maybe the media and the politicians are overestimating the
risk," said Olivier Huet, fund manager at London-based Edmond de
Rothschild. "Contrary to politicians, companies have a long-term
strategy."
Write to Jon Sindreu at jon.sindreu@wsj.com
(END) Dow Jones Newswires
December 01, 2016 05:44 ET (10:44 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.