I know it is hard to believe amid a selloff in global markets, but Europe looks pretty much like a safe haven right now; one with lots of political tension ahead of crucial elections and a central bank that's preparing to wind down quantitative easing, but a safe haven nevertheless.
There are several reasons for this. Perhaps the strongest reason is the fact that European stocks are still perceived as undervalued compared with U.S. stocks. Jim Cramer has an article out today about how Europe may be returning to the good old days; few investors outside the old continent seem to be noticing that shift right now.
A survey among 200 global fund managers with $592 billion in assets under management carried out by Bank of America Merrill Lynch between Mar. 10 and Mar. 16 showed the consensus view was that U.S. equities are by far the most overvalued globally: a net 81% of the participants said so. By contrast, a net 23% believe European equities are undervalued, and a net 44% believe emerging market stocks are undervalued.
This means there could be more upside for European stocks than for U.S. stocks, provided there are no "black swan" events ahead. The survey shows that a net 22% of fund managers in Europe say they are overweight cash, compared with a net 18% globally, indicating bigger firepower in Europe for when the opportunity arises for funds to be put to work.
The macroeconomic outlook seems to have improved, as well. A net 68% of participants expect the European economy to strengthen over the next 12 months, up from a net 63% last month. But they are not necessarily worried that this will mean the European Central Bank (ECB) will speed up its tapering of QE: Inflation expectations have fallen, with a net 66% expecting higher inflation in the next 12 months, compared with a net 89% in last month's survey.
In fact, a net 63% say monetary policy is too stimulative, a percentage that has risen from 55% last month, which could indicate that talk of tapering by the ECB has largely been priced in.
A net 84% of European fund managers do not expect a European recession. When it comes to the eurozone, the most important sources of growth are believed to be a global reacceleration of growth and a pick-up in capital expenditure, mentioned by 42% and 18% of fund managers, respectively.
Investors may be wondering what to look out for in terms of positive signals for risk appetite in Europe. According to the survey, the most positive factors would be an agreement on a structural reform agenda in major eurozone countries, evidence of growth in earnings per share of more than 10% and sustainable inflation.
Looking at sectors, industrials seem to be over-crowded, with a net 32% of European fund managers saying they are overweight. This triggers the Bank of America Merrill Lynch's analysts "contrarian sell" signal.
By contrast, utilities are the least preferred, with a net 47% of fund managers underweight. This seems to indicate, as I argued in a story last week, that investors should begin to look for entry points into European utilities. Another sector that is least crowded compared with its history is basic resources.
Looking at countries, sentiment towards British stocks has deteriorated, with a net 24% of investors underweight, while Germany remains the most popular market. Somewhat surprisingly, sentiment towards French stocks has improved markedly -- perhaps because Marine Le Pen is no longer seen as that much of a threat.
However, it is still way too soon to come to such a conclusion. Perhaps the biggest risk highlighted by the survey is that of complacency: Even if Le Pen wins, only 27% of fund managers see the Eurostoxx index, the blue-chip index for the eurozone, losing more than 10%, while 8% actually expect a positive reaction to her victory.
It is true that equity markets recovered and went on to hit new highs after both the Brexit vote and Donald Trump's surprise victory in the U.S., but it is unlikely that such enthusiasm would continue if Le Pen wins the French election. She wants to take France out of the eurozone and redenominate the debt, which would amount to default. Neither Brexit, nor Trump have had such an effect.
It is true that the French elections are the main political risk in Europe in the first half of the year. But volatility around it could create good entry points for investors who are looking for longer-term investment opportunities.