Why it’s time to go overweight Europe: Markit


Amid a volatile Chinese stock market and fevered anticipation over a U.S. Fed rate hike, European stocks are proving to be fruitful investment, data from Markit shows.

Investors who have been overweight on European stocks with a high exposure to Europe, the Middle East, and Africa (EMEA) have benefited from a jump in stock prices compared to those exposed to other regions like Asia and North America, a report by financial info services firm Markit revealed on Tuesday.

"Uncertainty continues to overhang global markets ahead of a potential U.S. rate rise and concerns over the health of Chinese and emerging market economies," the report, led by analyst Relte Stephen Schutte, explained.

"These factors and the ECB's 1 trillion euro ($1.1 trillion) stimulus program have resulted in interesting stock return variations across European equities in recent months."

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European companies with the greatest domestic exposure saw their stock price outperform those with the least exposure over the past 12 months. The most successful investors would have developed a strategy that shorted those stocks lease exposed to EMEA sales, and buying shares of the most invested in the domestic market, and reaped 14 percent in cumulative returns over the last 24 months as a result.

This strategy, Markit explained, would have been most useful during August's global equity sell-off.

"This implies that investors are relatively more concerned with the ability of companies to sustain foreign-based earnings – rewarding those with increased local sales exposure," Markit wrote.

A number of strategists and investments banks including Morgan Stanley, have become increasingly fond of Europe's stocks.

Morgan Stanley last month issued a "full-house buy signal" for European equities, based on market indicators that include valuation, fundamentals and risk. It was the fifth time since 1990 that Morgan Stanley has issued such a call, with four of the recent calls occurring during the market downturns of 2001-2003 and 2007-2009.

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Speaking to Squawk Box Europe this month, Goldman Sachs chief global equities strategist Peter Oppenheimer told CNBC he still favored European shares in the medium term, and would see the best long-term returns in Japan and Europe.

Markit also tracked record inflows to Europe-exposed exchange traded funds (ETFs) at $19.8 billion, with $3.5 billion of those inflows marked in August alone.

In contrast, those who turned to Latin America, Asia and North America "drastically underperformed."

European stocks with the most Asia-Pacific exposure "materially underperformed" by a cumulative 32 percent in the last 24 months when investors used the same long-short strategy, Markit explained.

Investing in European shares exposed to North America yielded negative returns of 25.7 percent, while Latin American-exposed stocks led to negative returns of 6.5 percent.

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