European equity overweights hit record high amid EM exodus
Global fund managers have begun 2020 with the biggest overweight in European equities on record while allocating the least to emerging markets in six years relative to benchmark, according to the Global Funds 2020 Positioning Themes report compiled by Copley Fund Research.
Based on Copley’s surveys of over 750 funds with assets totalling USD1.2 trillion, the report shows the overweight to developed European stock markets hitting a fresh high of 8.83 per cent at the start of 2020. All major European countries and sectors are held overweight, led by the UK, Germany and Switzerland, with Consumer Staples and Industrials the high conviction sectors.
“Confidence is recovering at a pace in Europe,” says Steven Holden, CEO of Copley Fund Research. “Investors are positioned for outsized returns almost across the board in terms of sectors and geographies as a pickup in economic growth combines with near certainty that the ECB won’t raise interest rates for a long time yet."
While global investors remain underweight in some banking stocks, such as HSBC and Banco Santander, the big stock overweights are Roche Holding Ltd and Reckitt Benckiser Group.
By contrast, allocations to emerging market equities are at the lowest levels in six years relative to benchmark indexes, at 4.98 per cent below their weighting in the MSCI All Country World Index. Global managers are underweight every major EM country and sector, led by China, Brazil, Financials and Materials stocks.
The wider underweight is partly driven by MSCI adding China A-Shares to its benchmark indexes during 2019. The average allocation by global managers to China and Hong Kong stocks stands at 3.89 per cent, a record 1.35 per cent below the iShares All Country World ETF weight of 5.24 per cent. Only 26.4 per cent of the global funds in Copley's analysis are overweight China and Hong Kong.
Key China underweights include Alibaba, China Construction Bank and ICBC.
Alibaba’s index weight is the largest component of the iShares MSCI Emerging Markets ETF (EEM) at 5.84 per cent, more than most entire country components including South Africa, Russia, Thailand and Mexico. That large size makes fund managers’ positioning on the company particularly tricky.
“Alibaba is still just a single entity with all of the associated risks and volatility but has a larger weight than many countries,” says Holden. “Most managers are sticking with their underweight stance given Alibaba’s opaque ownership structure and difficulties in valuing the business, even though it cost them in performance in 2019."
Russia remains a relative sanctuary within emerging markets. One of the best performers of 2019, Russia is the largest overweight in 2020, according to the data from Copley.
“Improving relations between Russia and Ukraine and Belarus, the outlook for energy prices and Putin's lower profile on geopolitical hot topics supports continued Russian investment,” says Holden.
Investment in Russia helped Global Emerging Market active fund managers beat benchmark indexes by 2.92 per cent in 2019, the widest margin since 2013, Copley’s data show.
US Tech stocks allocations are also at new heights, reaching a record 11.48 per cent of total investments. Yet even that investment level is 1.30 per cent below their representation in the benchmark MSCI All Country World Index index, showing an all-time underweight.
Though managers are overweight Visa (+32bps), Oracle (+15bps) and Mastercard (+11bps), these are dwarfed by the huge underweight in Apple of -1.59 per cent. Following Apple's stock return of 89 per cent in 2019, managers may be under pressure to bridge the gap, says Holden.
Semiconductors companies have won over global managers, who start the year with their largest ever exposure to the sector, at 3.27 per cent.
TSMC, Intel and Texas Instruments are the most widely held semiconductor stocks. Over the last 12 months, TSMC exposure has risen by 17bps. NXP Semiconductors saw the largest jump in ownership after 7.2 per cent of funds opened new positions during 2019.