Wall Street’s `Ultimate’ Contrarian Trade Finds New Friends
Bloomberg – Some of the least-loved equities in the developed world now have Morgan Stanley and Bank of America Corp. on their side.
Sure, doom and gloom is stalking the region’s “ Japanified” markets, stock performance is close to historic lows versus global peers, and Brexit chaos continues.
But betting on Europe — dubbed the “ultimate contrarian trade” by BofAML — could yet win over brave souls on Wall Street.
Consider the bullish playbook touted by the two U.S. banks: Cheap valuations and the potential bottoming in sentiment and economic data could spur foreign money managers to buck the herd for pastures new in Europe in the months ahead.
“Buying when valuations are at generational lows is the opportunity of a generation,” said David Marcus, the chief investment officer of New Jersey-based Evermore Global Advisors with about $1.1 billion in assets overall. “As special-situations’ investors, we have seen the number of companies going through strategic change grow dramatically, giving us compelling potential investments.”
Morgan Stanley touts cyclical equities in the region with exposure to China and the U.K., as well as sectors like autos, transport and real estate — where the valuation spread between high-beta and low-beta shares is particularly wide.
“Given the low starting point for both sentiment and relative valuations, we believe even a modest incremental improvement in the European macro backdrop should be helpful for European equities’ relative performance going forward,” strategists led by Graham Secker in a note this week, in a call that resonates with peers at BofAML.
Don’t get the wrong idea: European stocks have rebounded this year in line with U.S. counterparts after the December market mayhem. But appealing valuations haven’t reeled in money managers. As of late-February, European equity funds had lost about $120 billion in the space of 12 months, according to EPFR Global. Since the start of 2019, European equity funds have seen about $26 billion of outflows.
Sure, withdrawals are also a U.S. story but there’s a distinct Made-in-Europe feel about it.
Wouter Sturkenboom at Northern Trust Asset Management, which oversees about $1 trillion overall, is staying neutral on European stocks like many of his peers, despite improved earnings expectations.
“We do see tentative signs that U.S. investors are starting to get interested again, but we suspect they, like us, are waiting for more clarity on the political front,” the chief investment strategist for EMEA & APAC said. “Also, the recent growth slowdown, which we think is close to troughing, is keeping foreign investors cautious.”
U.K. Prime Minister Theresa May is facing a potentially catastrophic defeat Tuesday for her Brexit strategy as members of Parliament bemoan her revised deal.
Over at JPMorgan Asset Management, Tilmann Galler remains steadfast in his preference for U.S. equities. One reason: European profit growth is at the mercy of gyrations in the economic cycle, the global market strategist says. “Investors will likely stay on the sidelines in Europe until we get the promise of a lasting recovery in growth.”
Buying Europe is the divisive call du jour. SocGen, which is underweight eurozone stocks, said this week that tentative tailwinds — growth momentum, the end of trade tensions, and a Brexit deal — would spur only limited gains given the strong first-quarter rally.
And Capital Economics is uber bearish, projecting the MSCI EMU Index will drop by more than 10 percent this year, as stalling global growth hits earnings. On the plus side, the research house reckons eurozone shares will hold up better than American counterparts.
“U.S. investors can’t ignore the fact that growth is decelerating in the eurozone and the ECB is concerned about ’continued weakness’ and ’pervasive uncertainty’ in the economy,” said Invesco Ltd.’s chief global market strategist Kristina Hooper.
Contrarians may not shed their label anytime soon.