from Asset Allocator

Allocators remain cold on European equities

A feature of equity markets earlier in 2023 was the strong performance of luxury goods companies, many of which are listed in Europe, but derive the best of their prospects from China.

The reopening story in Europe did spur positive sales numbers from the likes of LVMH and over the past 12 months, the MSCI Europe ex-UK has returned 19 per cent while the MSCI World has returned just 12 per cent.

But more recent data has been moderate and the European market has underperformed.

What it didn’t spur was an uptick in demand from the DFMs we follow to own European equity funds.

The average allocation to such funds in the portfolios we monitor peaked at 5.4 per cent at the end of January, by the end of September it was down to 4.7 per cent.

The house with the largest exposure to European equity funds within their balanced portfolio is Quilter Cheviot at 9 per cent, while Handelsbanken have 8.8 per cent allocated there, and L&G Investment Management have 8 per cent.

At the other end of the distribution, AJ Bell and Tacit are among the firms with zero allocated to European equity funds, while the ration dispensed by Invesco, at 1.6 per cent is meagre indeed.

But the marmalade dropper here may be that Liontrust have halved their European equity fund exposure over the space of one quarter, from 14 per cent to 7 per cent, indicating John Husselbee and his team have turned on the asset class very quickly.

Some context here is that Liontrust has trimmed its equity exposure in its balanced portfolio more broadly from 68 per cent to 63 per cent.

When we asked them for their views, Liontrust said the European Central Bank's fight against inflation "looks challenging" and therefore European equities are "relatively less attractive" than UK equities.

They said: "The ECB's one-size-fits all approach to policy means there could be greater risk of inflationary hotspots. As in the Global Financial Crisis, the ECB must act unilaterally and has little room for nuance, meaning the prevailing policy could be inappropriate for large parts of the bloc."