This year’s least-loved stock market has now become so despised that at least one investor says it may be time to turn contrarian.
Manulife Investment Management, which oversees $837 billion, is on the cusp of turning overweight on European stocks after buying the dip in May, according to its global head of asset allocation, Nathan Thooft. The world’s favorite short trade, the region’s equities vindicated bears last month as they tumbled the most in more than three years, making them even cheaper relative to U.S. peers.
“A lot of negative news is priced in, flows have been very negative and valuations are supportive,” said Thooft in a London interview. “At the margin, we’re starting to think European equities are setting up to look for a better performance in the coming year or so.”
European equities slumped last month as messy politics in the U.K. and Italy combined with the fallout from the U.S.-China trade spat. Muted profit growth also didn’t help and JPMorgan Chase & Co. on Monday said that European stocks are unlikely to beat the U.S. unless the pace of their earnings gains overtakes that of American companies.
Amid this malaise, Manulife bravely bought European equities. This places the asset manager in stark contrast to the rest of the investment community as outflows from stock funds focused on the region have been almost relentless since March 2018.
‘It Can’t Get Much Worse’
May’s sell-off has brought European stocks closer to pessimistic strategist forecasts. According to the average response in a Bloomberg poll, the Stoxx Europe 600 Index is expected to fall 2.3% from Monday’s close to 362 points by the end of 2019.
And to think that things had been going so well for European stocks just a month ago. Recovering from last year’s plunge, the Stoxx Europe 600 had gained 16% since the start of the year through the end of April, in line with the 18% advance of the S&P 500.
In line with the market move, Manulife raised European stocks to neutral from underweight about six months ago.
“If you have a longer-term horizon, I’m pretty confident in saying that over the next several years, Europe probably offers better opportunities than the U.S.,” said Thooft. “It’s just a question of when and it’s a question of what’s going to be the catalyst that shifts the mindset, because right now if you look at the flow dynamics, no one loves European equities. And at some point in time, it can’t get much worse.'
Manulife Investment Management is the global wealth and asset management arm of Manulife Financial Corp., a Toronto-based multinational insurance and financial services company.
After starting the day on a negative note following the tech rout in the U.S., the Stoxx Europe 600 Index rose 0.4%, advancing for the second day. Manulife isn’t alone in seeing an opportunity in the recent sell-off: Credit Suisse Group AG raised continental European equities to benchmark today, citing earnings boost, fund outflows and overly pessimistic growth outlook.
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