Investors are considering buying European equities again for two main reasons, said Stuart Reeve, London-based managing director and director of research for the global equity team at BlackRock Inc. One stems from a statement made in the summer by Mario Draghi, president of the European Central Bank, that he will do “whatever it takes” to save the euro. Backed by subsequent political decisions, investor confidence in the eurozone has begun to stabilize.
The second is “from a valuation perspective, Europe looks more attractive,” trading on average at a 30% discount to U.S. stocks compared to a historical gap of between 10% and 20%, Mr. Reeve said.
BlackRock's global dividend income strategy, for example, has been adding to an overweight position to European equities within the past six months, said Mr. Reeve, who is lead portfolio manager. (BlackRock declined to provide the specific percentage in the overweight position and total active European equities AUM across all strategies.)
In addition, European equities yield an average of 4% in dividends compared with an average of 2% for U.S. stocks, said Neil Dwane, managing director and chief investment officer for Europe at Allianz Global Investors, Frankfurt. Particularly when comparing global companies, European stocks can be a better value. For example, shares in Royal Dutch Shell PLC are relatively cheaper than Exxon Mobil Corp. in terms of such measures as a price-to-earnings comparison. Shell is trading at a p/e ratio of 8, compared with 11 for Exxon.
“We're now overweight Europe,” Mr. Dwane added. AllianzGI manages €23 billion ($30 billion) in European equities across all strategies. At the end of October, its Europe equity growth strategy had €7.6 billion, up 70% from the beginning of the year.
But investing in European-listed equities is not the same as investing in European economies, Mr. Reeve added. “These problems aren't going away, and will take a long time to fix. Therefore, companies that are very exposed to domestic economies will be an impediment to good returns. We don't own European retailers, for example.”
Mr. Reeve is also steering clear of European financials. From a perspective of three to five years, “there are two questions that investors need to answer if they're investing in European financials: how much capital (banks) need; and what margins they're allowed to earn, which drive returns. I don't have great visibility on both.”
T. Rowe Price Group Inc. has gradually expanded its European equities team through the eurozone crisis, adding seven new positions in the past three years to a total of 22 dedicated European analysts and portfolio managers. Assets under management invested in European equities across all strategies were €17.7 billion as of Sept. 30.
Within the firm's global equities strategy, exposure to Europe is edging up, although it's still an underweight position. As of the end of November, the strategy was underweight Europe by 1.5 percentage points compared with the MSCI ACWI, up from an 8.1 percentage pointsunderweight position in March.