Investors’ most and least favoured European countries

Investors shifted massively into eurozone equities in February, with the second highest allocation recorded for the asset class, a survey of fund managers by Bank of America Merrill Lynch shows.

The survey was carried out among 196 panellists with $559 billion in assets under management between February 6 and February 12.

It showed that eurozone exposure was the highest since May 2007 and that cash levels among fund managers stayed in “buy” territory, at 4.7%.

The survey has a rule according to which when cash levels rise above 4.5% they trigger a contrarian “buy” signal for equities, and when they fall below 3.5%, a contrarian “sell” signal is triggered.

It also showed that the excess of European over US sentiment was at an all-time high, a net 76%, from 10% last month.

“Optimism on Europe seems overdone – expect profit-booking,” the analysts at Bank of America Merrill Lynch warned.

Sentiment towards the eurozone improved dramatically once the European Central Bank (ECB) announced its plans to start quantitative easing by buying sovereign bonds in March.

On the back of the ECB’s QE, there was a big rise in expectations of a stronger European economy, at 81% from last months’ 49%, the highest since January last year.

Within the eurozone, investors’ favourite country was Germany. Europe’s biggest economy has benefited from the weaker euro, which lifted its exports. It has seen stronger-than-expected economic growth in the last quarter of last year.

The German gross domestic product expanded by 0.7% in the last three months of 2014, an annualised pace of growth of 2.8%.

In its official forecasts, the European Commission increased its estimate for Germany’s growth to 1.5% for this year from the 1.1% it was expected in forecasts published in November.

Investors favour Germany

In the eurozone, investors prefer Germany. Source: Bank of America Merrill Lynch

Some analysts recommended last year that investors move into German stocks, which were cheap and stood to benefit from the ECB’s easing of monetary policy.

On the other side of the coin, investors’ least favourite countries in Europe are the UK and Switzerland.

In the UK, uncertainty is on the rise as the election is approaching and extremist nationalist party UKIP has changed the focus of the political agenda.

In Switzerland, the central bank’s abrupt decision to scrap the Swiss franc’s peg to the euro has made stocks unattractive as the currency appreciated sharply, and sent shockwaves through other asset classes in other markets.

In the global survey, contrarian “longs” are materials, energy, emerging markets and commodities, while contrarian “shorts” are, besides the eurozone, Japan and consumer discretionary.

Unsurprisingly, Europe was the most preferred region to be overweight in over the next 12 months, rising to 51% from 18%, the highest reading on record.

It also has the most favourable profit outlook, a big jump compared with last month.

In terms of risks, investors’ fears about geopolitical risks increased this month compared with January, while their worries about eurozone deflation decreased.

@AntoniaOprita

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