The time to be overweight Europe is over, says analyst

Key Points
  • Europe has become the "crowded trade", says Longview Economics' Chris Watling.
  • Despite Europe's popularity and improving economics, investors should be looking now to the U.S.
Time has come for the ECB to step back on QE: Fidelity

Europe's time in the sun is over and investors should be refocusing their strategies on the U.S., according to one analyst who is betting against the "crowded trade."

Chris Watling, chief executive at Longview Economics, told CNBC Wednesday that Europe is now overdone and the region is at risk of facing another downturn if investors continue to buy into the rally.

"What worries me is that Europe has become the crowded trade. It's fund managers' favourite trade, everyone's overweight," said Watling.

"If you look at some of the technical metrics – how many stocks are overstretched – they're back at the extremes we saw when Europe last peaked in April 2015."

"The time to move overweight Europe is done and in fact you should be drawing that down and shifting, probably to the U.S.," Watling suggested.

Europe has undergone a resurgence in interest over recent months as investors have seen opportunities to find value amid continued geopolitical risk.

We're not alone in being positive on Europe: Fidelity

The pan-European Stoxx 600 began on a downwards trajectory in April 2015 but has largely been on the up since late 2016 as economic fundamentals across the region have improved.

This has prompted a rush in to European equity markets. Fidelity International's investment director, Tom Stevenson, told CNBC Wednesday that he expects as many as 60 to 70 percent of fund managers to now be overweight Europe.

"That's always a slightly worrying signal," noted Stevenson. However, he maintained that the European economy looks in "good shape" with strong fundamentals.

New research released today by BofA Merrill Lynch Global Research suggests that European equity markets currently offer a higher yield than high-yield European credit markets.

"The positive outlook for equities is underpinned by a robust earnings recovery. Leading indicators suggest additional EPS upside particularly in light of strong operating leverage from corporate Europe, and we see the asset class finally realising the positive convexity it offers to the earnings cycle," the note said.

"While remaining constructive for high yield credit, as it offers better cushion to rising rates versus its IG counterpart, we think that European equities present a better upside opportunity."