European equities may gain as much as 10 percent this year as sovereign bonds become less attractive, according to BNP Paribas Investment Partners and Amundi, two of France’s biggest fund managers.
Christian Dargnat, chief investment officer of BNP Paribas Investment Partners in Paris, which oversees the equivalent of $655 billion, expects an 8 percent to 10 percent gain in 2013 and last month started buying Spanish and Italian shares. Romain Boscher, global head of equities at Amundi in Paris, which oversees $948 billion, predicts a “low double-digit” rise and has been increasing exposure to so-called cyclical stocks.
“We’re returning to some stocks in the periphery to play a return to normal,” Dargnat said in a phone interview. “All companies in Italy and Spain, no matter what their quality, were penalized by the cost of financing. That has improved and will continue. That favors a revaluation of their stocks.”
The Stoxx Europe 600 Index climbed 14 percent in 2012, the most in three years, as the European Central Bank and the U.S. Federal Reserve announced stimulus measures. Spanish 10-year yields have dropped 2.64 percentage points since a high on July 24, while the corresponding Italian yields slid 2.44 percentage points during the same period.
“We have the feeling that in 2013, we are moving farther and farther from systemic risk,” Dargnat said. “Monetary policy is very accommodating. That will continue.”
ECB policy makers last week kept the benchmark interest rate at a record low of 0.75 percent. ECB President Mario Draghi promised on July 26 to do whatever it takes to preserve the euro.
In the U.S., The Federal Reserve said it plans to keep the main rate near zero until unemployment falls below 6.5 percent and as long as inflation remains less than 2.5 percent.
Federal Reserve Bank of Chicago President Charles Evans yesterday said the U.S. central bank should keep policy accommodative to support the world’s biggest economy, even after Federal Open Market Committee minutes, released Jan. 3 in Washington, showed a split on how long the $85 billion monthly bond-purchase program should last.
Still, investors should focus on European stocks with the highest potential for earnings growth over those with the cheapest valuations even as central-bank support boosts risk appetite, according to Argonaut Capital Partners.
“There is a big liquidity rush that has made everyone enthusiastic, but it won’t go on for the rest of the year,” Barry Norris, who helps manage $1.2 billion as a partner at Argonaut in London, said in an interview. “Equities will rally because they are the least-worst option among asset classes. But investors have to be very selective and pick companies that can grow profits even in a difficult economic environment.”
BNP Investment Partners maintains its preference for defensive shares, or those less dependent on economic growth. Still, Dargnat said “at one moment or another, we’re going to need to move to cyclicals.”
In the second half of 2012, Amundi started buying more stocks sensitive to the economy and Boscher expects the strategy to bear fruit in the first half of this year.
“The heart of preoccupation was the Chinese economy and we reached the low point there in the third quarter,” Boscher said in a phone interview. “We prefer companies with exposure to emerging markets. That’s why we’re optimistic. European companies are exposed to the rest of the world. Last year was proof of that.”
Chinese gross domestic product will probably increase more than 8 percent in 2013, China Securities Journal reported yesterday, citing unidentified analysts. That’s higher than the 7.7 percent median estimate in a Bloomberg survey for growth in 2012.
China’s economic recovery is a sign global demand will improve this year, Australian Treasurer Wayne Swan said Jan. 13 before a visit to Hong Kong. December economic data including industrial production and fixed-asset investment as well as a report on fourth-quarter gross domestic product are due on Jan. 18.
Dargnat and Boscher both are optimistic that the flow of money into European equities will increase as returns from monetary and bond investments dwindle with lower interest rates.
“We hope and anticipate movement into stocks,” Boscher said. “Investors will put aside less cash. They are getting itchy with the cash and will invest it in stocks.”