The leadership of the global bull market has moved to Europe, many investors believe, as the rally in the United States becomes elongated and tired, and Asia looks treacherous.
Global investors are widely overweighted to Europe, and many remain optimistic despite April's drops. European markets, although increasingly prone to fits and starts as they climb, are earlier in their bull phase than is the U.S. market, some investors say.
"It's going to be an exciting environment" in Europe over the next three to five years, said Michael Levy, managing director and head of international equity at Bankers Trust Corp., New York. Despite expected volatility, he anticipates "excellent returns from European equity markets on a one-year and a three- to five-year basis."
Ted Tyson, chief investment officer of Mastholm Asset Management, Bellevue, Wash., is "comfortable that the economic recovery in Europe can be extended. This is probably a two- to three-year phenomenon."
European bulls cite a variety of supporting factors: signs of brightening economic conditions; corporate restructurings; and the stirrings of a new equity investing culture.
Such attractions already have put a firecracker under European markets, so much so they became prone to an April pullback.
Still, 1998's gains dwarf those in the United States. For example, for this year, through April 28, market gains in dollar terms include 33.16% in Italy, 36.51% in Spain and 25.95% in France. In comparison, the Standard & Poor's 500 stock index was up only 11.82%.
Corporate earnings projections are one underpinning for Europe. After solid gains last year, earnings-per-share growth in European markets is expected to continue this year, and at a brisker pace than in the United States. According to London's ING Barings, for companies in a major market index, EPS growth should average 16.2% in France, 16% in Germany, 34.6% in Italy and 23.2% in Switzerland.
In comparison, average EPS growth for the S&P 500 are projected to be only 6%, ING Barings projects.
For the year ending April 15, 1999, New York-based I/B/E/S/ International Inc. reports a consensus forecast of average earnings per share growth of 11% for the S&P 500; 15.1% for companies in Germany's DAX-30; 10.7% for the CAC-40 in France; and 40.9% for those in the BCI Index in Italy.
Not surprisingly, ING Barings recommends global equity investors' biggest overweighted position be in Europe, at 1.82 percentage points overweighting. It also recommends overweighted positions -- although to a lesser degree -- in Latin America, South Africa and Japan, and an underweighting of 2.17 percentage points to the United States.
Quite a few global/international managers concur with the idea of overweighting Europe:
* For its non-U.S. equity portfolios, Mastholm Asset Management has 76% in Europe. But recently, the firm made significant changes in its holdings, to favor the "more economically sensitive companies" of Europe, such as those in construction, machine tools and retail companies, and away from more defensive stocks, such as pharmaceuticals, and interest-rate sensitive banks and insurers, said Mr. Tyson.
* Edinburgh Fund Managers, Edinburgh, Scotland, has a 41% exposure to Europe vs. about a 37% index weighting. In last year's third and fourth quarter, it took 10 percentage points of exposure from Japan and the rest of Asia and invested it in Europe, said Investment Director Richard Muckart.
* Guinness Flight Hambro Asset Management, London, is remaining bullish on Europe despite the decision about a month ago to take some profits. But the money will be used to reinvest on market weaknesses, said Andrew Couch, head of international equities. He said Guinness Flight is "holding (the cash) to reinvest on market weakness" mostly on the Continent.
* Arthur A. Micheletti, chief economist and investment strategist for Bailard, Biehl & Kaiser, Foster City, Calif., believes the markets of Europe and the United States are both overvalued and driven by "speculative mania." But he believes the overvaluation is more pronounced in the United States. In the firm's global balanced portfolio, it recently reduced its U.S. equities weighting to 32% vs. the normal 40%. However, among non-U.S. stocks, it has so far retained an overweighted position to European equities. Despite problems he sees in Europe, "we're going with (market) momentum," he said.
* CDC Investment Management Corp., New York, is still "net bullish on stocks, although we're more cautious than we used to be," said President Bluford H. Putnam. Although the firm took some money out of each of the three major regions -- Europe, U.S. and Asia -- in March, it's remaining overweighted to Europe. In contrast, the firm, which runs hedge funds, is slightly underweighted in the United States and Asia.
But is this a good time to increase weightings to Europe? At least some managers would argue not. In a report last week, Bridgewater Associates Inc., Wilton, Conn., argued against the merits of buying world equities now on pricing dips. Given the strong rallies earlier this year, Bridgewater believes valuation attractions in Europe have diminished. In fact, "the recent rollover in world equity prices has only resulted in a slight uptick in our average valuation reading," Bridgewater said.
Nonetheless, valuations are "only one piece of our overall equity systems, which are inclusive of momentum readings . . ." the report said. "When these momentum readings are combined with the value signals, we are neutral to moderately bullish on industrialized equity markets." Specifically, Bridgewater is "moderately bullish" on Japan, France and Australia.
Even the U.S. market has some supporters these days. Laszlo Birinyi, president of Birinyi Associates, Greenwich, Conn., sees signs of "positive net flows to Europe and the U.S.," even in April. Specifically through April 27, there was $10.8 billion of net buying of shares on the New York Stock Exchange, he reported. (The comparable figure for all of March was $16.3 billion.) "At the beginning of this year, I said I expected the (U.S.) market to trade above 10,000 in the Dow sometime this year," said Mr. Birinyi. "There's been no change in my view."