European earnings season is ramping up, with big companies lining up to report results next week, and investors can't wait. Sentiment on eurozone equities is back near record highs, a recent survey of fund managers by Bank of America Merrill Lynch shows.
"Europe is in vogue according to global investors, with the overweight in eurozone equities back near record highs and EPS expectations accelerating. European investors remain positive on the macro outlook and are looking for a global reacceleration," Ronan Carr, European equity strategist, said in a statement detailing the results of the survey.
The poll was carried out between Oct.6-Oct.22 among institutional investors. The global survey had 179 participants with $516 billion in assets under management, and the European one had 87 participants, with $182 billion.
In the global survey, expectations of a "Goldilocks" scenario of above-trend growth and below-trend inflation beat gloomier predictions of low growth and inflation for the first time in six years. "Long Nasdaq" was voted the most overcrowded trade for the fifth time this year, followed by "long U.S./EU corporate bonds" and "long eurozone equities."
So, if investors believe that going long eurozone equities is one of the most overcrowded trades in the global markets right now, why are they still doing it? A look at the survey of European fund managers offers some clues.
Investors are still positive on Europe's prospects. A net 57% of those who answered the European fund managers' survey expect the European economy to strengthen over the next 12 months. That figure is up from a net 46% in a similar survey last month.
The main reason for economic strength in Europe is likely to be a global re-acceleration, followed by a rebound in consumer demand in the eurozone and a pick-up in capital expenditures, the survey shows.
Earnings expectations have increased as well, with a net 67% of European fund managers expecting higher earnings-per-share growth over the next 12 months, a big jump from a net 31% last month. A majority now expect double-digit EPS growth, whereas in last month's survey a majority of respondents were predicting only single-digit growth.
Sentiment is so high that European stocks seem pretty much priced to perfection, ahead of a week where big, important companies will report third-quarter results. Among them, automakers including France's Renault (RNLSY) (Oct. 24) and Peugeot (PUGOY) (Oct. 25), Germany's Volkswagen (VLKAY) (Oct. 27) and Italy's Fiat Chrysler (FCAU) (Oct. 24), miners including Anglo American (NGLOY) (Oct. 24) and Antofagasta (ANFGF) (Oct. 25), and drug makers including Novartis (NVS) (Oct. 24) and GlaxoSmithKline (GSK) (Oct. 25).
Next week is a big week for European banks as well, with four giants expected to report: Britain's Lloyds Banking Group (LYG) (Oct. 25) and Barclays (BCS) (Oct. 26), Germany's Deutsche Bank (DB) (Oct. 26) and Spain's Santander (SAN) (Oct. 26).
Respondents in the European survey are overweight stocks in the "core" eurozone countries Germany and France, followed by the Netherlands, Sweden and Spain. They are underweight equities in the U.K., Switzerland and Italy.
Among the global fund managers, the biggest risk they quote is that of a policy mistake by the Fed or the European Central Bank. This is followed by risk brought on by the tensions with North Korea, and the danger of a crash in global bond markets.
It is a sign of the times that investors put the danger of central bank policy mistakes ahead of the normally scarier threat of nuclear war. Central banks have been running the show for so long that markets will need to learn to walk again after policymakers no longer hold their hands.
Besides earnings, next week also brings a monetary policy meeting by the European Central Bank on Thursday. If history is any guide, too-high expectations going into these meetings have often ended up in disappointment.
