We recently looked at the spurning of European equities after a year of underperformance. 

This discontent looks seems to have become embedded, as our latest sentiment indicator shows. 

DFM optimism on European equities has soured in the four months since we last checked. In September, 52 per cent of allocators were neutral here, while 38 per cent were negative. 

Now, 45 per cent of allocators view the asset class negatively, indicating that DFMs are keen to avoid Europe’s sensitivity to global market movements.

Invesco investment director Ben Gutteridge has a low allocation to European equity funds, which stands at just 2.1 per cent, considerably below the peer average. 

“On balance, there is less inclination to support European markets relative to others. In the short-term we would highlight the risk of a European Central Bank policy error as it tackles inflation – potentially too vigorously. Over the long term the lower potential growth rate, in part a function of the fragmented market, diminishes the appeal of a greater allocation.”

Indeed the average allocation to such funds in the portfolios we monitor remains pretty stagnant at 5.1 per cent. The house with the largest exposure to European equity funds is Quilter at 9.4 per cent, while Invesco are at the other end of the distribution.

The folks at You Asset Management outlined for Asset Allocator their reasons for being cautious on European equities. 

“We are underweight Continental European equities. We think that the macroeconomic conditions look very challenged as evidenced by recent GDP data and Germany going into recession,” they said. 

“We believe the ECB are potentially further behind on their tightening cycle than for example the US. With large differentials in individual country inflation rates, a single interest rate policy for all can cause material challenges.

"The market also looks relatively less attractive on a valuation level compared to Japan and the UK and hence we remain underweight.”

The manager of the most popular European equity fund in our database, Giles Rothbarth who runs the BlackRock European Dynamic fund, tends to agree on his cautious regarding Germany where he has a large underweight.

The country he has the biggest overweight to is Denmark, a fact which is largely driven by the performance of Novo Nordisk which last year briefly became the most valuable company in Europe and which is the fund's largest single holding.