Pioneer is firmly in the European equities camp

Added 6th March 2015

European markets are expected to outperform this year following the massive stimulus programme unveiled by the European Central Bank, according to Fiona English, client portfolio manager at Pioneer Investments.

Pioneer is firmly in the European equities camp

Europe is one of the highest yielding equity markets globally and dividends are expected to grow further once companies start showing an improvement in earnings growth, she said in an interview with Fund Selector Asia.

"European equities are offering the potential for both higher income and capital appreciation – we believe they are an attractive proposition for Asian investors who wish to achieve a higher yield and participate in what we expect to be an outperformance in European markets this year."

Appeal for European equities

The ECB’s stimulus has raised expectations that export-oriented companies in the eurozone economies will benefit from a weaker euro. 

But European companies now need to show an improvement in their earnings to set the stage for a sustainable market rally.

“Everybody is talking about the ECB’s QE. But given where the market is today, unless we see earnings growth start to come through, the market will find it harder to trend higher.

“European companies are increasingly global in nature and we expect these companies to continue to benefit from greater earnings growth in the US and from certain emerging economies also.” 

European equities are atttracting attention from US investors as well, she said, citing rotation of capital into Europe.

“We have seen a lot of flows from US investors over the last month. They are recognising that the divergence in central bank policy -- namely quantitative easing in Europe, a depreciating euro and greater expectation for growth -- may result in European equities outperforming this year.”

The appeal of European equities was evident among delegates who recently attended FSA’s income forum. A majority of those surveyed showed a preference for this asset class.

A separate survey by the Hong Kong Investment Funds Association showed managers are turning positive towards European markets, with 58% of the respondents taking an overweight position in January, up from 31% in October.

Preference for cyclical 

Pioneer Investments has a preference for the cyclical sectors instead of banks and financial services, English said.

The fund house is looking at companies in the industrial and material sectors that are available at attractive valuations, show a greater visibility in terms of earnings growth and can deliver high yield as well. 

“We are overweight materials at the moment, which is unusual and people do not expect it.

"We find cyclical sectors quite interesting from a valuation perspective. We have a preference for the cyclical areas of the market because we think they have lagged the markets and in some cases are probably going to have greater earnings this year.” 

Apart from materials, the fund house is overweight on industrials and to some extent consumer discretionary companies in some of its portfolios.

But it has a benchmark weight to banking stocks. Going forward, there could be some beneficiaries in the sector, but the fund house believes now is not the time to become overweight on the sector.

“Some clients are saying, `if you have high expectations for growth, wouldn’t you be overweight financials?’ We just feel it is a little bit early at this point. We would like to see greater visibility in the sector.

“As it stands today, there are probably some headwinds for the sector. Although the asset quality review is completed, the new European regulator is already beginning a different dialogue with banks, potentially leading to `personalised’ capital ratios dependent on the perceived risk of each entity.

"Secondly, there are already some signals that although credit availability [and demand] is improving, the margins commanded for these new lending arrangements are lower.

“While bank participation in greater earnings growth will come at a later stage, today probably is not the time to be overweight the banking sector.”

Sustainable dividend growth

English believes investors are going to focus increasingly on sustainability of dividend growth.

"Areas of the European market offering high dividend yields performed well last year. We expect to see a shift this year. Investors will become more discerning and seek to combine quantity of yield with quality.

“They might be happy to take a slightly lower yield but one that is backed by earnings growth. Focus would be more on dividend growth.”

According to her, investors are migrating to equities from fixed income.

"Given what the ECB or other global central banks have done, we have seen yields coming down on fixed income instruments. We are seeing more and more investors allocating to equities not as a choice per se but more as a need. Equities are not offering only yield, but also the potential for growth in this yield and capital appreciation potential."

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