(Bloomberg) -- Growth remains slow, the Brexit saga is far from over and yet, European assets are gaining favor with investors.
The reason? There are several, including optimism that a no-deal Brexit is off the table and that the U.S. and China are making progress in trade talks. But in Europe’s case, it’s also a contrarian call on buying a market that has been largely avoided by investors this year.
“We saw that the positioning was particularly poor and Europe was one of the more unloved and under-owned areas of the world,” said Nathan Thooft, head of global asset allocation at Manulife Investment Management, which has been buying European stocks in October. “As soon as people start to see positive signs, they come running back and the opportunity for the upside is still there."
Just this year alone, European equity funds have lost about $100 billion to outflows, even as the returns have been comparable to those of the S&P 500 index. Fund managers see Europe as the region with the least favorable profit outlook among major markets, according to the latest Bank of America Corp (NYSE:BAC). fund manager survey. And they have a point since Germany on Thursday slashed its 2020 growth forecast and is flirting with recession.
But the October moves in key European markets are signaling that bears may be giving up some of their positions. The euro, which last month hit a two-year low, is the best-performing major developed-market currency after the pound this month, while the Euro Stoxx 50’s 2.5% gain in U.S. dollar terms is three times that of the S&P 500. And Europe’s primary bond market jumped back to life on Thursday and may set a new annual record by the end of next month.
Strategists from JPMorgan Chase & Co. and Bank of America turned bullish on European stocks earlier this month, saying that economic data are hitting lows and can only get better from here, whereas low investor positioning creates ample room for entry.
“Given the strong consensus underweight and fading political uncertainty, some international investors view Europe more positively now,” said Ulrich Urbahn, head of multi-asset strategy and research at Joh Berenberg Gossler & Co. “There is a bigger chance now that Europe can attract more inflows in the coming months."
And now that Boris Johnson managed to bridge a deal with the European Union, all eyes are on his ability to get it through Britain’s Parliament. Success would be a major positive catalyst for European and U.K. assets. European stocks are unlikely to jump 5% overnight if a deal is passed, but it’ll fuel further upgrades in investor positioning, according to Manulife’s Thooft.
Reports that the EU and U.K. were closing in on a draft deal sent the STOXX Europe 600 to the highest level in 17 months on Tuesday. The likes of JPMorgan (NYSE:JPM) said that euro-area stocks would be a key beneficiary of increased political clarity.
Speculation that the U.K. is nearing a Brexit deal pushed Sanford C. Bernstein strategists led by Inigo Fraser-Jenkins to raise European equities -- but not the U.K. -- to overweight. Analysts blame passive funds for their different views on Europe and the U.K., saying that index-tracking funds for Europe excluding the U.K. have seen strong selling over the past 18 months, whereas U.K. passive funds has seen no material exit.
“Europe has been left behind and it is proving to be a wrong choice already,” said Alberto Tocchio, chief investment officer at Colombo Wealth SA, who has bought call options on European stocks on expectations of a Brexit deal. “A potential resolution of the Brexit issue could be the spark that would lead to some major inflows into Europe over the next months."