BNP Buys European Stocks as ECB’s ‘Wall of Money’ Gives Support

BNP Paribas Asset Management began buying European equities in small quantities after the European Central Bank moved to support the region’s lenders.

The asset manager, which overseas $668 billion, started decreasing its “underweight” position on European shares in December and cut its “overweight” on the U.S., Christian Dargnat, the Paris-based chief investment officer of the fund house, said in an interview. In diversified portfolios, BNP Paribas reduced its cash position in favor of European stocks.

The Stoxx Europe 600 Index posted its biggest January gain since 1998, which extended the rally from last year’s low on Sept. 22 to 18 percent. The ECB in December gave the region’s banks 489 billion euros ($638 billion) in 1,134-day loans, the most ever in a single operation, to ensure banks had enough cheap cash to continue lending to companies and households.

“A wall of money was put into place,” Dargnat said. “We’ve started to become more positive. The ECB’s operation was the impetus. It tells the world that Italy and Spain won’t be insolvent.”

BNP Paribas Asset Management hasn’t changed its industry positioning and retained its “underweight” stance on shares of financial companies and those whose earnings are tied to economic growth.

“Three months ago we were very cautious,” Dargnat said. “Now, we are just cautious. It’s time to be less defensive.”

Political Risk

Dargnat said this doesn’t mean he’s rushing to buy more European stocks as further action is needed from policy makers to contain the debt crisis and improve fiscal discipline.

“Why aren’t we more aggressive?” he said. “There are still political decisions to be made. We’re at the mercy of any rash declaration. Clients are still very risk averse.”

The Stoxx 600 dropped 11 percent last year, its worst performance since 2008, as leaders struggled to stop the crisis from spreading to Italy and Spain. The gauge is trading at 10.8 times the projected earnings of its companies, compared with an average valuation of 11.9 over the past five years, according to data compiled by Bloomberg.

“For the past 30 to 40 years, countries of the West have been getting further and further into debt,” Dargnat said. “At some point, the bill comes in. It’s a long-term process and we’re not going to resolve the problem overnight.”

He said European nations must move towards greater integration.

“When this day arrives, it will be a positive for stocks,” Dargnat said. “They are inexpensive; so the investment flow will return naturally. If these measures come together, and some are on the way, investors will start to come back to European stocks.”

Dargnat said he expects European stocks to finish the year higher, but with periods of gains and losses as volatility remains.

“We are cautious, but we can be reasonably optimistic for the full year,” he said.

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