Outflows from European equity funds over the past 22 months show the retreat from the sector was overdone.
This is according to Swisspartners’ CIO, Peter Ahluwalia, whose team is betting on European blue-chip names.
‘Earnings forecasts and the overall outlook for European equities are probably too negative and the underperformance of European equities versus their US counterparts over the last six years or so looks too extreme.'
Ahluwalia and his team are overweight European equities and expects European GDP growth to accelerate and close the gap with GDP growth in the US.
‘We would not be surprised to see a period like 2003-2007 when European equities significantly outperformed their US counterparts.’
Some of the European names Swisspartners invests in are French manufacturing company Saint Gobain, French manufacturer of automotive parts Faurecia, Italian manufacturer of electrical power transmission systems Prysmian Group and Belgian chemical company Solvay.
‘European equities trade at a cheaper price-earnings ratio to their US counterparts, have a much higher dividend yield when compared to the relevant risk free rate, have a higher risk premia and have a wave of negative sentiment built in.’
He added that it is more difficult to find value or growth at a reasonable price in the US equity space than in Europe.
‘However the US equities are not overpriced. The US economy will remain in the Stop-and-Go mode and we expect that the US equities will perform well further down the road. The upcoming earnings season set the bar so low that it should be possible for companies to surpass low expectations’.
The asset manager said he had managed to buy great US names at discount prices. Some of the titles he holds in are electronics corporation Best Buy, biotech company Gilead and pharmaceutical company Abbvie, all of which still offer attractive valuations and growth prospects.
Meanwhile, the asset manager is worried about the fixed income. His team keeps durations short and tends to use global bond funds to allocate to the sector, for example Payden Global Fixed Income fund, Rubrics Global Fixed Income fund and NN (L) US Credit P Cap fund.
‘Rather than speculate in some of the racier elements of fixed income we prefer it to be an anchor within portfolios. We are also more overweight in government bonds.’
Ahluwalia said alternative assets proved to be good stabilizers in the portfolios, therefore his allocation to the asset class is relatively high at around 19%. The strategies, he invests in, include Twelve Falcon ILO fund, True Partner fund and PTR-Agora.
‘We play this via a combination of funds and the blend is extremely important, including insurance linked, market neutral, real estate, volatility based strategies.’