The research team at London-based exchange-traded fund issuer Source favours European equities over those of the US and holds a maximum overweight position in the Eurozone in its multi-asset model portfolio.
ETF issuer Source overweights Eurozone in multi-asset model portfolio
Although the team is neutral on equities in general and the prevailing market sentiment is negative towards Europe after recent volatility and poor performance so far in 2016, it believes the Eurozone economy is still accelerating and valuations look attractive while US equities have become too expensive.
The team is neutral on the UK given Brexit-induced uncertainty.
Andras Vig, Director in the Source Research team, commented: “Total return from European equities has been near zero over the year-to-date, as negative sentiment has offset decent dividend income and growth.”
“While there are pockets of risk in Europe – mostly in banks – we believe the prevailing negative sentiment is not justified. Although some of the uncertainty will remain, there is enough growth to support equities in the region. In particular, we have also softened our negative stance on European oil & gas and have upgraded it to neutral.”
“While we remain more positive on equities in Europe than the US, we still expect steady economic growth in both regions, although the UK might experience a mild recession. Our US allocations have become more defensive with an upgrade to healthcare and a downgrade to retail, in both cases to neutral.”
“We remain positive on banks and bearish on basic resources in both the US and Europe.”
Potential trades
Investors need to be conscious of the team’s overall neutral position on equities, but funds such as the Source EURO STOXX 50 UCITS ETF (LON: SX5S) and the Source EURO STOXX Optimised Banks UCITS ETF (LON: S7XP) could be deployed to dial up relative exposure to the Eurozone and banks.
The Source EURO STOXX 50 UCITS ETF tracks the performance of the EURO STOXX 50 Index, the leading blue chip index for the eurozone. The index covers 50 mega-cap stocks from the 12 Eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. With a total expense ratio (TER) of just 0.05%, the fund is one of the cheapest vehicles to track the index. It has more than €500m in assets.
The Source EURO STOXX Optimised Banks UCITS ETF tracks the performance of the EURO STOXX Optimised Banks Index. This index covers 24 securities from eurozone countries that belong to the banking sector. Securities are screened to reduce exposure to illiquid stocks and an individual stock cap of 20% is applied. The fund has a TER of 0.30% and assets of over €260m.