The European Central Bank’s recent programme of quantitative easing, purchasing bonds in the open market, has had a profound impact on markets in Europe, even before the purchases began, believes Baring Asset Management (Barings), the international investment firm.
Over the past few months, European equity markets have rallied, while both bond yields and the euro have fallen to historic lows. The euro weakness has had a significant positive impact on European exporters in particular. However, these market movements are not only down to quantitative easing. Economic data in Europe has been improving recently, and sentiment around European assets has improved considerably.
Hartwig Kos, Investment Manager, Baring Euro Dynamic Asset Allocation Fund, comments: “Over the past six months we have undertaken a significant shift in the fund. In August last year, we had 25% of the fund in US equities, with very little in Europe; we now have no US equities and nearly 30% in European equities. Our European position also includes a 10% allocation to European small caps which we believe will benefit from the more positive economic environment indicated in the recent economic data.”
Having celebrated its second anniversary in March, the Baring Euro Dynamic Asset Allocation Fund has returned 10% since inception on an annualised basis, and 21.55% on a cumulative basis, outperforming the 3 month EURIBOR +3%p.a. which has delivered a return of 3.2% and 6.65% respectively. The Baring Euro Dynamic Asset Allocation Fund follows the same strategy as other Barings’ multi asset funds, taking a global perspective but ensures that at least 50% of the fund’s exposure is in Euros.
Hartwig Kos concludes: “On the fixed income side, we are also invested in European high yield debt, which we believe will be positively impacted by the general search for yield in the market. We have also found the risk premia in Russia and Brazil to be particularly attractive.
“Another theme in the portfolio is our allocation to European property. While we do not yet see any overall inflation in Europe, we do see asset price inflation due to a mismatch of interest rates – the ECB benchmark rate is too low for the economic conditions in Germany and other northern European countries, so property prices and credit are booming in those regions. To capture this opportunity, we have taken positions in a number of real estate investment trusts across northern Europe.”
Elsewhere, Barings has also allocated a sizeable allocation to Japanese equities as Japan remains an attractive proposition thanks to its stimulative monetary policy and strong earnings.