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Markets and your money: Europe makes a comeback

European equities and tech stocks led in May
June 1, 2017

European equities have gone from fund managers' biggest headache to their best performers, having joined tech stocks at the top of the leader boards in May.

The best performing Investment Association (IA) fund sector over the month to 30 May 2017 was Technology and Telecommunications, with a sector average return of almost 6 per cent. It was followed by European Smaller Companies, with a sector average return of 5.2 per cent, and Europe excluding UK, with 5.03 per cent. Europe including UK funds also did well, with a sector average return of almost 5 per cent over the month to 30 May.

Until recently, US stocks were leading the pack, with MSCI USA index returning almost double MSCI Europe ex-UK in 2016. But so far in 2017, MSCI Europe ex-UK index has returned 13.5 per cent, against 5.02 per cent for MSCI USA.

Investors had been fearing a break-up of the European Union (EU) since the start of 2017 and fretting over the spread of far-right populism, with fund managers more worried about EU disintegration than anything else for six out of the past eight months, according to a recent Bank of America Merrill Lynch survey. But the election of French president Emmanuel Macron in April sent a wave of relief through markets, so in May fund managers cast aside their Europe worries and Chinese credit tightening shot to the top of their concerns.

The trickle of better economic data from the eurozone is giving markets a concrete reason to feel cheerful.

Alastair Winter, chief economist at Daniel Stewart & Co, says: "The best economic news in May just kept coming out of the eurozone. Bullish business and consumer surveys in Germany are being matched in laggards such as Italy and France, and now 'hard' numbers such as gross domestic product (GDP), industrial production and retail sales are perking up. One might be forgiven for thinking that a boom was under way and first-quarter GDP growth of 0.5 per cent in the eurozone really was considerably stronger than the UK (0.2 per cent)."

The euro is now on track to be the best-performing currency in the G10 group of countries for the first half of 2017 and bonds have been reacting to the performance, too. "Improved optimism about future prospects and receding deflationary threat in the eurozone, led the 10-year German real bond yield to edge higher and the euro to strengthen," say analysts at asset manager Lyxor.

Technology stocks are the other clear winner at the moment, with the so-called FAANG-tastic five - Facebook (US:FB), Amazon (US:AMZN), Apple (US:AAPL), Netflix (US:NFLX) and Google Alphabet (US:GOOGL) - driving US and global stocks. The S&P 500 and tech-flavoured Nasdaq indices hit new highs in May, driven by tech gains and oil prices. Apple, Google, Amazon, Facebook and Microsoft (US:MSFT) ave been the top five contributors to the S&P 500's gains this year - despite still relatively modest earnings.

It implies that the value-orientated 'Trump trade' has given way to a far frothier technology trade. The Trump trade dominated in the latter half of 2016 and was a play on cheaper, unloved value-style stocks in the US, which looked set to benefit from President Trump's spending plans. Value-style cyclical stocks dominated and looked set for a prolonged period of gains. But they have fallen back in the year to date, and in May momentum and growth indices easily outperformed value.

MSCI USA Value index returned 0.9 per cent over the month to 30 May, compared with 4.6 per cent for MSCI USA Momentum. MSCI World Momentum index returned 4.2 per cent, compared with just 1.6 per cent for MSCI World Value index.

 

The winners and where to position

The best-performing funds over the month were a mixed bag, with Polar Capital UK Absolute Equity (IE00BQLDRR58) and Baillie Gifford Global Discovery (GB0006059223) emerging as the best performers among open-ended funds. British & American Investment Trust (BAF) and Northern Investors Company (NRI), which is in wind-down, emerged as the best-performing investment trusts over the four weeks to 30 May. Both have increased their dividends every year for more than 20 years.

Emerging markets remain cheap, but less so than a year ago, according to wealth manager Whitechurch Securities. And although Japanese equities ticked up over the month, this was not the case for sterling investors who experienced a loss due to a stronger pound against the yen.

According to Lyxor, fund managers with exposure to cyclical stocks listed in Europe and the US have been underperforming, and if the tech trade continues in the US that trend may continue. This means that value-oriented funds may not be the best performers in the immediate future. However, with global stocks reaching record highs and looking expensive, bears argue that now is not the time to be chasing growth stocks.

"There's just no other way to say it, but global equity markets are insanely overvalued right now," says David Scott, investment manager at Andrews Gwynne. "The so-called US recovery has already lasted 96 months. It's the longest recovery in history and also the weakest. The next big correction is coming. And the decision by central banks to paper over the global economy's troubles with a massive injection of debt probably means this is already overdue."

 

MARKETS IN A MINUTE

Style: Momentum UP, value DOWN

Assets: Equities UP, bonds DOWN

Sectors: Healthcare, tech and biotech UP, Mining, financials and banks DOWN

Equities: Europe UP, China DOWN

Bonds: Index-linked bonds UP, gilts DOWN