Despite the rightward tilt of the recent European parliamentary elections, Quintet Private Bank’s chief investment officer is talking up what seems like unexpected good news for Europe. The Eurozone economy, he said, features growth rates exceeding forecasts, while in the United States, they are falling below expectations. He emphasised that the change in growth is what counts, not so much the level.
“The fundamental case for Europe is building up,” said Daniele Antonucci, Quintet’s chief investment officer, told Investment Officer in a recent interview. “I mean economic growth, earnings growth, valuations, they are attractively valued even prior to the sell -off in French stocks.”
A plan to finance an increase Quintet’s “somewhat underweight” European equity exposure by closing its global (mostly US) small-cap position has been placed on hold because of the increased uncertainty.
Taking stock
Quintet’s investment committee has decided to pause and “take stock of this uncertainty,” he explained. “It’s out there and everyone can see that.”
“That (transaction) would have kept our equity exposure the same and would have rebalanced towards the market [Europe] where we thought that the fundamentals were improving,” he explained. “But when you have this degree of political uncertainty, the thing that people want is kind of the safer economy – the safer economy is the US.”
Even considering these recent developments, Europe’s economic situation still looks better.
Attractive valuations
“Unlike other developed markets, such as the US, where valuations are on the demanding side, if you were to compare Europe versus the US, you would describe European valuations as attractive,” he said.
Europe has faced bad press as a place to invest in the past. “I don’t believe it’s entirely the case that something in markets is always one way,” said Antonucci.
Antonucci pointed out that Italy has one of the best-performing stock markets across the developed world. Italy outdid the Nasdaq exchange, he said, “because valuations were so cheap,” he said. “It’s the delta.”
Cycle in markets
“To say that because GDP growth in Europe tends to be weaker than in the US, there’s no investment opportunity, so Europe will always lag,” he stated. “The facts don’t suggest that, there is a cycle in markets, it’s value versus growth.”
Quintet expects the Eurozone to grow more than one perceent this year while its forecast for the US economy has been lowered to two percent.
“What is important to note here is not that the European economy is only expected to grow at half the rate of the US. Rather, it is the change that matters most: Conditions in the eurozone are improving, while they are deteriorating in the United States, although we do not see a US recession on the horizon,” said Antonucci in a Quintet press release.
Sticky delay
Eurozone central banks have already begun to cut interest rates, while the US Fed is still dealing with “sticky inflation”, which is likely to delay the start of the US Federal Reserve’s rate-cutting cycle expected to start around year-end. Economists believe the ECB’s first rate cut since September 2019 could help the economy.
Despite the approach of higher interest rates, Antonucci said “bonds are making a comeback”.
“If you buy high-quality bonds, especially corporate bonds – in Europe, we like quality corporate bonds, or companies that existed yesterday, exists today, will exist tomorrow, you can lock in quite a good rate of return, for a low volatility,” he explained.
Overweight corporate bonds
Quintet’s portfolio is overweight on European high-quality investment-grade corporate bonds, he said. However, it is underweight on high-yield bonds and riskier credit.
“That’s an asset class that’s mostly exposed to the US,” he said. “The differential with safe bonds is minimal – spreads are tight, we say.”
However, there’s a time limit on this opportunity. “You want to lock that in before interest rates begin begin to decline.”
Diversification mitigates geopolitics
Antonucci said since “we live in a more fragmented world, a more multipolar world”, a globally diversified portfolio has to “mitigate the impact of local events, meaning geopolitical or otherwise.”
Quintet bought commodities early this year. “Physical stuff, you need to move it around,” as well as gold.
“At the start of the year, we bought more US Treasuries, which didn’t deliver performance in the first half,” he explained. “They lagged equities, but they’re the ballast that you have in the portfolio — they can protect or mitigate downside risk if one of these risks were to materialise.”