Europe shift Move Over Wall Street

Donald Trump’s business-friendly plans may have seen US markets reach record highs this year, but it’s Europe where experts now see the potential for higher equity returns, as shown in a new market report.
Investors are swerving away from the US and towards Europe.

It was a surprising result, but one that pleased investors. In the first three months of 2017, equity funds achieved returns in the high single digits, some even more.

"Such an impressive showing was not necessarily to be expected in the face of political uncertainties," said André Härtel, a fund expert at Scope Analysis.

He has drawn up a value development summary for Handelsblatt. It reveals that equity funds with a focus on Latin America performed particularly well, thanks to an average yield of 11 percent. Attractive profits were also seen in other regions - especially Europe. Bond products, on the other hand, were not a source of happiness, with some even suffering minor losses.

The summary shows the average performance of investment funds within 36 important investment strategies from January to March. Performance over the past five years is also included. "This shows, for example, that markets in Latin America made up only a part of their losses from previous years in the past few months," said Mr. Härtel.

In the second quarter, optimism is moving from the United States to Europe. Lars Transberg Rasmussen, analyst, Danske Invest

Analysts with private bank M. M. Warburg have noticed "substantial price gains" since the beginning of the year. Chief strategist Carsten Klude says this market euphoria is only partly due to the inauguration of US President Donald Trump, which spurred US markets to record gains. "It is overlooked that global economic data are currently better than they have been for a long time," explained Mr. Klude. In particular, the German economy is "in impressive shape."

Owners of equity funds with a focus on Germany are accustomed to good figures. Funds with barometer stocks and shares of small companies have generated attractive returns in recent years. The current quarterly profit of 7 and 8 percent for both fund groups is also encouraging. And Mr. Klude is optimistic that performance will improve even further.

Based on the strong business outlook, he has raised his end-of-year target for the DAX, Germany's benchmark blue-chip index, to 12,800 points. It is currently around 12,100 points. He is even flirting with a higher level, in the event that share valuations rise only slightly above their level from two years ago. In that case, the DAX could reach 14,000. His conclusion is that "the markets are still in green-light mode." He explicitly includes Wall Street and Europe in his positive outlook.

Although other market observers shy away from so much optimism, they also do not expect any major crises. A possible burden would be the tightening of monetary policy by central banks. In theory, and judging by past experiences, interest rate increases are "poison for dividend values," as Franz Wenzel of Axa Investment Managers noted. But in his assessment interest rates would have to rise significantly to reach a critical level, which is unrealistic.

This is why many experts believe that critical investment wisdom is still valid. Carsten Roemheld, a market strategist with fund company Fidelity, puts it in simple terms: "Stocks should outperform bonds in 2017."

Differences of opinions only emerge when individual regions are considered. In terms of fund evaluation, there is a long-standing ranking: Products broadly invested on Wall Street generate 15 percent annual returns and those invested in Europe generate 10 percent, while the figure is only 5 percent for stock markets in emerging economies. A trend reversal could be emerging in the current quarterly balance sheets, namely that the ranking has been reversed.

Europe's new edge over Wall Street is especially intriguing. Lars Transberg Rasmussen, an analyst with Danish investment management firm Danske Invest, said: "In the second quarter, optimism is moving from the United States to Europe."

He accuses Europeans of being politically too pessimistic and of ignoring the strong business situation until now, and he thinks a mood booster will occur on this front in three weeks. "If (right-wing populist candidate Marine) Le Pen loses in the second round of the French presidential election on May 7, European stocks could rise as the financial markets react with relief," he said.

Fund manager Luca Pesarini, who manages the well-known Ethna-Aktiv mixed fund at Ethenea Independent Investors, thinks along similar lines. In his opinion, US share prices were "driven to airy heights" by Mr. Trump's business plans, whereas Europe was long neglected because of political risks. But the outlook is now more positive after the parliamentary elections in the Netherlands, he explained. Mr. Pesarini has increased the number of shares in his fund, mainly with European stocks.

Fund manager Bert Flossbach is a fan of investing in equities. The co-founder of the Flossbach von Storch asset management firm also views dividend values as a kind of positive residual value when comparing large asset classes. "The bond market can be described as the mother of all bubbles," he said, citing high prices together with low interest rates. He also recognizes signs of overheating in real estate. "Stocks are the last important investment class in which low interest rates have not yet been reflected in correspondingly higher valuations," he noted.

This is why the Cologne-based investment management firm has placed more than half of its money in shares in its large Multiple Opportunities mixed fund. However, Mr. Flossbach does not see the future through rose-colored glasses. He currently holds nearly a quarter of the fund's capital in cash, the largest cash position in almost nine years. Mr. Flossbach expects movements in the market in 2017 and wants to take advantage of lower prices to buy up shares. But he does not expect the market to plunge, noting: "The cash rate is not a crash rate."

Ingo Narat is an editor with Handelsblatt's finance section. To contact the author: [email protected]