Sentiment Shattered Even as Europe Stocks Erase Brexit Loss

Updated on
  • Stoxx 600 recoups losses caused by U.K. vote to leave EU
  • Investors underweight area’s shares for 1st time in 3 years

What European Earnings Season Signals for Investors

European stocks may have bounced back from Britain’s vote to leave the European Union. You can’t say the same for investor sentiment.

The Stoxx Europe 600 Index needed seven weeks to recover after the Brexit referendum result that triggered its biggest slump since 2008, much longer than shares in the U.S., Asia and even the U.K. But even as that wound heals, evidence of the trauma lingers in options, volume and fund flows. The gauge slipped 0.2 percent on Friday.

While recent economic data have beaten forecasts and financial results at companies including Munich Re and LVMH Moet Hennessy Louis Vuitton SE have topped projections, investors have been shunning Europe’s equities, with funds tracking the shares seeing outflows for 26 straight weeks. This month, volume in shares of Stoxx 600 companies was about 13 percent lower than this year’s average.

“Just because we are seeing the index at a certain level, we should not be inferring a broader positioning,” said Michael Ingram, a market strategist at BGC Partners in London. “The truth is that Europe has massive structural issues.”

Even with the bounce, skepticism about the efficacy of central-bank stimulus has sent the Stoxx 600 down 5.2 percent this year, with investors turning underweight on the region’s shares for the first time in three years, according to a Bank of America Merrill Lynch survey last month. Economists have lowered their growth forecasts for the euro area to 1.5 percent for 2016 and 1.2 percent for 2017, and analysts, who in January saw higher profits at Stoxx 600 companies, now project a 3.9 percent contraction.

Still, the the outlook isn’t all gloomy, according to Vincent Bourgois at Zadig Asset Management, which manages 850 million euros ($947 million). While most expected a catastrophic scenario after the Brexit vote, companies including GlaxoSmithKline Plc and Siemens AG have actually raised their earnings outlooks.

“People were bracing for something really nasty, but Europe was better than people gave it credit for,” the investment adviser said, referring to the fallout from the Brexit vote. “What matters is what companies are saying. And what they are saying in Europe is not bad at all.”

At 3.6 percent, the dividend yield for Stoxx 600 companies is particularly attractive when compared with bond rates that, for some countries such as Germany, are below zero.

But traders are pricing in a 27 percent jump in volatility for euro-area equities in the next three months and have increased the number of bearish options outstanding to 20 million, about 56 percent more than bullish ones. Contracts betting on an 18 percent slump in the Euro Stoxx 50 Index by the end of the year are the most owned, data compiled by Bloomberg show.

“As much as we think equities might be overdone, there are not many alternatives giving us a decent rate of return,” according to Peter Dixon, a global equities economist at Commerzbank AG in London. “Things might not be quite as rosy in the second half, and maybe markets are going to come round to that way of thinking. As more and more investors start to play it cautiously, the momentum goes out of the market and we start to get a turnaround. ”