By Jon Sindreu
As politics spook European markets, some large fund managers are buying battered stocks and bonds in a bet that
worries about rising populist movements are overblown.
Europe's political calendar is staked with votes that could result in antiestablishment upsets. A referendum in
Italy on Sunday could topple a reformist government. Next year, the Netherlands, France and Germany all face elections
in which euroskeptic parties could post gains that some investors say may hurt economic growth and threaten the euro's
But some money managers see an opportunity. If political fears are overstated, now is a chance to buy on the cheap,
Their wager gets to the heart of an age-old debate: Just how critical are political developments to global markets?
Not very much, said Vincent Mortier, deputy chief investment officer at Amundi, Europe's largest asset manager with
EUR1.1 trillion in assets. Amundi holds more European assets, especially equities and real estate, than allocated by
"Eurozone assets have been under too much pressure by non-European investors--U.S. investors in particular--which
presents some opportunities," Mr. Mortier said.
Shares of companies in the Euro Stoxx 50 are trading at less than 16 times their earnings over the last year,
compared with 20 for the S&P 500. In Italy they are even cheaper. Shares on the FTSE MIB are trading at 13 times their
So some investors are starting to poke around for bargains.
This year, European equity funds have suffered a net outflow of $97 billion, data from EPFR Global shows. But the
most recent data shows two weeks of consecutive inflows for the first time since February.
Stephanie Butcher, a manager of European equity funds at Invesco Ltd., has bought Italian stocks in those sectors
she thinks have been unfairly punished. Those include energy, infrastructure and even banks. Shares of Italian banks are
down 50% since the start of the year, compared with an average decline of 7% for banks across the eurozone.
"They have been impacted simply because they are Italian," said Ms. Butcher, whose company has $808 billion under
management. "One has to come to the conclusion there's a discount there."
Many other investors argue European stocks and bonds are cheap for a reason. Underlying their jitters are the
eurozone's complex politics and a recurring fear that the existence of the single currency is under threat.
While it remains unclear how a country could leave the eurozone, investors are once again concerned about the
possibility of an attempt, said Neil Dwane, fund manager at German asset manager Allianz Global Investors, which handles
$541 billion. In recent years, worries have flared that a financially struggling Greece would be forced to exit the
Spreads between Italian and French 10-year government bonds and those issued by Germany, the region's economic
powerhouse, are at two-year highs, in one sign of investors' concerns. On Wednesday, the yield on Italy's 10-year bond
was 1.97%, compared with 0.26% on comparable German debt.
"If you end up with very stark political divergence at the center of Europe, it definitely starts to rip itself up
at the seams," said Mark Dowding co-head of investment-grade debt at London-based BlueBay Asset Management, who is
taking a cautious stance on eurozone bonds.
The next big political test for markets comes on Sunday, when polls suggest that Italians will reject a proposed
constitutional reform that threatens to derail Prime Minister Matteo Renzi's efforts to nurse Italy's beleaguered banks
back to health.
A defeat could lead to Mr. Renzi's resignation and a boost for the country's populist 5 Star Movement.
Polls have consistently underestimated the strength of antiestablishment movements in recent elections. They were
wrong in their predictions that the U.K. would vote to remain in the European Union and that Donald Trump would lose the
U.S. presidential election.
As a result, investors are taking little comfort from polls showing that euroskeptic candidate Marine Le Pen is
trailing in the French presidential race set for April 23 and that the populist Alternative for Germany is in third
place ahead of a German general election expected around September.
Analysts who predicted market mayhem in the event of populist victories were also off the mark. That means European
markets--especially stocks--have a bigger chance of bouncing than plunging, some investors argue. Even if they win,
euroskeptics are likely to water down their plans to make them more investor-friendly, these money managers say.
"If at some point we are relieved from political pressure, this would definitely trigger a relief rally in Europe,"
said Vincent Juvyns, fund manager at J.P. Morgan Asset Management.
At the core of such optimism is the belief that the economy, which is showing signs of a recovery, is more
important for markets than politics are. The eurozone economy expanded in November at the fastest pace so far this year,
according to IHS Markit. Official figures released this week confirmed that gross domestic product returned to growth in
both Italy and France in the third quarter, while Italian unemployment ticked down in October.
"Maybe the media and the politicians are overestimating the risk," said Olivier Huet, fund manager at London-based
Edmond de Rothschild. "Contrary to politicians, companies have a long-term strategy."
Write to Jon Sindreu at email@example.com
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