JPMorgan, ING Buy Europe Stocks in Contrarian Brexit Trade

Updated on
  • Stoxx 600 remains lower than its pre-Brexit vote levels
  • European earnings forecast to fall this year, climb in 2017

JPMorgan Asset Management and ING Bank NV see an opportunity in the exodus from European shares brought on by Britain’s secession vote.

ING’s Simon Wiersma started buying stocks of the region’s companies in July, and Stephen Macklow-Smith of JPMorgan Asset said he may invest more after making some purchases following the U.K. referendum. The verdict on their bullishness has yet to be rendered: despite a rebound, the Stoxx Europe 600 Index remains below its pre-Brexit level.

Macklow-Smith and Wiersma are adding to European stocks at a time when most investors remain preoccupied by the region’s political turmoil, slow growth and declining earnings. To them, better-than-expected economic data mean the euro area’s recovery will stay on track amid accommodative monetary policy, leading to more equity gains.

“Right now, Brexit’s effects aren’t being felt -- if you look at economic surprises, clearly the economy is in better shape than economists had predicted and assets had priced,” said Macklow-Smith, who helps manage $2.2 billion of European equities for JPMorgan Asset in London. He declined to specify which shares he bought recently. “What we’ve done is bring down levels of cash and added to high-conviction companies across the board.”

Macklow-Smith’s JPM Europe Equity Fund, which holds Nestle SA and Sanofi, keeps less than 1 percent of its holdings in cash. That compares with 5.4 percent held by investors globally this month, according to an Aug. 16 Bank of America Corp. report. He’s eyeing stocks of companies that benefit from an economic expansion and those with exposure to emerging markets.

While economists have cut their euro-area growth forecasts for this year and next, recent data have signaled improvement and little impact from the British secession vote. An index tracking European services and manufacturing showed the fastest expansion in seven months, German investor confidence rebounded in August, and U.K. retail sales were the strongest they’ve been in any July since 2002.

Wiersma, who helps manage 26 billion euros ($29 billion) for ING’s Dutch private clients, turned bullish on global stocks after the most recent earnings season. Almost two-thirds of European firms beat projections, BNP Paribas Investment Partners’ multi-asset team wrote in an Aug. 23 note.

“Looking at the environment, we see the numbers for the second quarter weren’t bad in Europe,” he said. “To get a return on your investment in this low-rate environment, you should pick up a little bit more risk.”

Most investors, though, are skeptical about European stocks, and a Bank of America report showed managers withdrew money from the region’s equity funds for a record 29 weeks. After briefly erasing its post-Brexit loss, the Stoxx 600 went back to trading below its June 23 level this month and is down 5.8 percent for the year. The gauge, which beat U.S. and Asian peers in 2015, now trails them amid concerns about the ability of the European Central Bank to spur growth, while analysts project a 4.1 percent contraction in earnings for 2016.

Add to the mix elections in Germany and France next year, an upcoming referendum in Italy and uncertainty about the Brexit negotiations, and the risks attached to European equities are too high for Natixis Asset Management’s Yves Maillot. He expects the Stoxx 600 will struggle to exceed 350 and may even retreat to 320 by the end of the year. The index stood at 344.75 at the close on Tuesday.

“We took profits one month ago and decided to stay very defensive for the summer time,” said Maillot, head of European equities investment at Natixis Asset Management in Paris. “There’s so much liquidity from central banks that everyone elevates risk, but that can only go so far. In the short term, we don’t see a good scenario as a result and think the equity markets will go sideways.”

Still, in the search for returns, equities remain a top pick. The 3.6 percent dividend yield that Stoxx 600 companies offer compares with record low -- sometimes even negative -- rates for government bonds. The European gauge trades at 15.1 times estimated earnings, compared with 15.7 for the MSCI All-Country World Index.

“People are very underweight and skeptical over the equity story, and that certainly makes stocks attractive relative to bonds and cash,” Macklow-Smith said. “European equities are not overvalued. If there’s any sort of uptick in earnings, then valuations look attractive again.”