LIVE MARKETS-Where to make space for a Europe overweight? Sell big tech

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WHERE TO MAKE SPACE FOR A EUROPE OVERWEIGHT? SELL BIG TECH

European equities played a helpful role in portfolio construction in 2023 and 2024, as global asset allocators could be underweight Europe to allow them to own a lot of U.S. tech, some Japan, and possibly dabble in China.

Now, as people grow more optimistic on Europe - because of peace in Ukraine, a new German government, defence spending etc. - what do they own less of to make room?

"Large cap, and it's going to come from tech, because that's the stuff that's up the most," said Jim Caron, chief investment officer of the portfolio solutions group at Morgan Stanley Investment Management.

According Barclays data published Wednesday, the average global fund is heavily exposed to the tech sector with nearly one-fourth of the total allocation going to it.

And the shift Caron mentions is showing up in their data, which saw flows to Europe ex-UK reached their highest level since Jan 2022 in February.

They also said hedge funds' exposure to tech was falling sharply, though long only funds were still buying.

Flows data matches market moves. Europe's STOXX 600 .STOXX is up 9% year to date, and Germany's Dax .GDAXI, up 14%, while the S&P 500 is up 1.25% .SPX. Interestingly the equal weighted S&P 500 has outperformed, up 2.6%. .EWGSPC

Morgan Stanley's Caron too has joined in on the European excitement.

"(At the start of the year) we were underweight Europe. We moved that to neutral earlier in the year, and we took Europe to overweight prior to the German elections," he says.

He sees scope for more gains ahead as reforms in Europe gather pace.

"Even if the process is really slow, as long as you tell me the direction of travel is that way, I can pick up things at a low enough value that I'm willing to continue to do so," Caron added.

"Even though it's up, I don't think, 'Oh, my God, it's up 15% you got to sell, we're done'. No, I think that it can continue."

(Alun John)

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