BlackRock and Eaton Vance Get Behind Europe’s Show of Unity
BlackRock and Eaton Vance Get Behind Europe’s Show of Unity
(Bloomberg) -- Guardians of the eurozone project are winning over once-skeptical investors with their show of stimulative force to battle the economic downturn.
The European Central Bank doubled down on its bond-buying program this week, while Brussels announced a 750 billion-euro ($848 billion) recovery fund. It’s enough to flood liquidity into economies leveled by the pandemic. For investors, there’s a bigger hope: shared debt between rich and poor nations, and policy coordination in a region that’s been notoriously divided.
Regional-level borrowing is “a dramatic step forward in promoting European cohesion,” said Chris Dyer, director of global equity at Eaton Vance, which oversees about $42 billion in stocks.
Cohesion is exactly what markets wanted. Stock indexes in Germany, Italy and France ended the week with gains exceeding 10%, and Spain capped the biggest rally since 2008. The euro surged and the spread between German and Italian bonds narrowed to the closest level since March.
Dyer said he’s favoring European stocks in global portfolios, reckoning they are trading at a 23% discount to American companies.
That European leaders acted swiftly is its own surprise. Stimulus packages during the sovereign debt crisis of 2012 and global financial meltdown three years earlier were punctuated by policy wrangling and Germany’s devotion to fiscal austerity.
Avoiding European markets could leave investors with “painful” regrets, according to Morgan Stanley’s Graham Secker.
“The valuation re-rating in European currency, bond and equity markets isn’t going to be small, it could be quite decent,” said Secker, chief European equity strategist at Morgan Stanley. He recommends banks and high-yielding peripheral nations.
Faith in the region’s policymakers is paying off for PGIM Fixed Income, which is running bets on Italian and Spanish bonds.
“We had an overweight in peripherals going into this crisis and for a while that was trouble,” said Robert Tipp, head of global bonds and chief investment strategist at PGIM Fixed Income, which oversees $868 billion from Newark, New Jersey.
More outperformance may be in store. As economies recover, other central banks are more likely than Europe to push up benchmark rates, according to Tipp.
“European rates were low before the crisis, and they’ll likely still be low after as well,” Tipp said. “That stable interest rate backdrop bodes well for having less downside risk compared with the Treasury market.”
The solidarity between European Central Bank President Christine Lagarde and German Chancellor Angela Merkel is also reinforcing beliefs about the euro’s stability, pushing the shared currency to a three-month high.
“This is definitely a positive for European assets and should make them more attractive to global investors,” said Jean Boivin, head of BlackRock Investment Institute.
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