A return to "the good old days" is not on the cards just yet, but at least Europe appears to be in recovery mode, according to the latest issue of The Cerulli Edge-Europe Edition.
"Allocators have turned bullish on Europe as quick as they have turned bearish on emerging markets and China", commented Barbara Wall, director at Cerulli Associates. "They even like European banks-albeit on a selective basis. It is sensible to be cautious. Bottom-up stock picking will dominate a market that is still jittery."
While allocators and active managers are more chipper about European stock prices and the quality of firms that have slimmed down and reorganized, fund buyers are not fully on message.
Surprisingly, the most upbeat would appear to be Spanish investors, who poured €232.4 million (US$308 million) into local equity markets during the first five months of the year. But equity flows are still outweighed by much larger flows to bond funds. That pattern is reflected in other European markets.
"It is difficult to predict when Europe's love affair with bonds will fizzle out, but investors need to be disciplined as new issuances surge," cautioned Yoon Ng, a Cerulli associate director. "The European high-yield market has grown fast-and flabby at the edges. Benchmark huggers face losses and liquidity constraints if outflows pick up. A strategic rethink may be necessary to avoid being caught out."
The state of the fund-of-hedge-funds industry is another cause for concern. That it has gone very wrong for funds of hedg funds is not in dispute. The industry has hemorrhaged assets, funds have been forced to close, and consultants have largely backed away, preferring cheaper and more liquid diversified growth funds. But all is not lost. Lower fees and a more client-centric model might help get the industry back on track.
- European real estate could be a strong investment theme over the next 12 months. British property equity funds report resurgent interest, particularly for portfolios focused on London and the South East. Even the German open-end property market seems on the mend.
- Non-bank lending could be a real financing alternative for European small and mid-market companies if they ar prepared to negotiate that tricky cultural shift from a mono-banking culture to one where private debt is firmly on the menu. Plain vanilla direct lending funds are gaining traction, but the more exotic products are finding it a slog.