The European conundrum

After Wall Street’s biggest weekly decline since June and the worst week this year for the Dow average, investors will be searching for a rebound.

By Angela Moon (Reuters)

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Published: Sun 18 Aug 2013, 10:37 PM

Last updated: Sat 4 Apr 2015, 7:50 AM

But the best gains may not be at home as investors take notice of an improved outlook in Europe.

Fund managers have started to shift to eurozone equities after a series of economic indicators showed the region finally emerging from recession.

The region outperformed US stocks in recent weeks, ending 0.2 per cent higher last week while Wall Street underwent a two per cent loss. For the month so far, the total return of eurozone equities is around 1.9 per cent compared to a 1.8 per cent loss on the S&P 500 index. That’s a very different picture from the first half of the year when the S&P 500 posted 12.6 per cent growth, while the pan-European FTSEurofirst 300 index had a mere 1.6 per cent growth.

The difference might also point to which parts of the US market are likely to perform well after a long run by companies that do the lion’s share of their selling within America’s borders.

“The increase in volatility and uncertainty we’ve seen throughout the eurozone is finally coming to an end,” said Diane Garnick, chief executive of Clear Alternatives, an asset management firm in New York. “We are much more comfortable looking at US international companies that have exposure in Europe, given the stability we see there now,” Garnick said, adding that she favors Johnson & Johnson over other stocks with big exposure to the domestic market like Walgreen.

Flows into European equities from US-based funds hit a two-month high in the week ended August 14, data from Thomson Reuters Lipper service showed, signalling steady investor appetite for the single-currency bloc’s shares. A Lipper basket of 92 funds invested in European shares, which include exchange-traded funds’ holdings, took in a net $755 million, the biggest inflow since a record $1.17 billion in mid-June and a rise from the prior week’s $580 million inflows.

A Bank of America Merrill Lynch survey of fund managers for August showed a net 20 per cent of respondents would overweight the European market over a 12-month period, the highest reading in over six years. That made investors’ top choice over this horizon Europe, ahead of Japan. “With macroeconomic views of the eurozone increasingly positive, investors are positioning for gains in the region’s equities,” the survey said.

But while money managers are talking about an undervalued Europe, eurozone troubles have not disappeared. Germany’s quarterly growth still was just 0.7 per cent. US stocks have been hit recently by weak earnings from bellwethers like Wal-Mart and Cisco and by concerns that the Federal Reserve may start reducing its bond-buying program as early as next month.

Investors will get a better sense of what the Fed’s plan is this week from the central bank’s July meeting minutes to be released on Wednesday at 2:00pm (1800GMT).

Economic indicators during the week include existing-homes sales, also due on Wednesday, weekly jobless claims and PMI Markit Flash manufacturing index on Thursday. New-home sales data is due on Friday.

Apple at $500

Shares of Apple jumped nearly 11 per cent for the week, outperforming the Nasdaq, which ended 1.6 per cent lower. Trading volume soared both in the stock and options markets last week after billionaire Carl Icahn said he owns a big stake in the company, which he believes to be undervalued.

“It’s almost like ‘sell the market and buy Apple’,” said J.J. Kinahan, chief strategist at TD Ameritrade in Chicago.

“I think the next level to look for is around $520 and $525, which are the areas with a lot of options activity,” he said, adding that if Apple shares move above these levels, they have the potential once again to become a Wall Street darling. The stock ended up 0.9 per cent at $502.33 on Friday.

Entering the last week of earnings announcements, a number of retailers are due to report, including J.C. Penney on Tuesday. Target is due to report on Wednesday and Gamestop is scheduled to report on Thursday.

Home improvement stocks like Home Depot and Lowe’s are also due during the week. Data on Friday showed US housing starts and permits for future home construction rose less than expected in July, suggesting that higher mortgage rates could be slowing the housing market’s momentum.

Home Depot shares are up nearly 22 per cent this year and Lowe’s is up nearly 45 per cent so far in 2013.

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