A $50 Billion Fund Cuts Europe Citing German Fiscal Stance

(Bloomberg) -- One of the Nordic region's biggest pension funds is cutting its holdings of European stocks, and instead piling into U.S. equities.

Varma Mutual Pension Insurance Co, which manages more than $50 billion from its base in Helsinki, has almost doubled its U.S. listed stock portfolio this year. Varma's chief investment officer, Reima Rytsola, says fiscal stimulus is the key: the U.S. is doing it, Europe isn't.

Rytsola is now waiting to see whether that dynamic will shift. He says the changing of the guard at the European Central Bank may be pivotal. With Christine Lagarde taking over the ECB presidency from Mario Draghi, the question is whether a seasoned politician will be able to change Europe's policy mix in a way that her predecessors couldn't.

Rytsola says he hopes Lagarde will “use her political capabilities and networks” to bring about a broader sea-change in Europe when it comes to fiscal policy. More specifically, the hope is that Lagarde can persuade “the German wing to be more on board on a fiscal stimulus package.” If that happens, Rytsola says he would “probably” start buying European equities again.

Read More: Germany's Balanced Budget May End Finance Minister's Career

For now, the U.S. economy is “structurally better composed,” Rytsola said in an interview. That's why his listed equity portfolio has 41% in North America, up from 24% at the end of 2018. At the same time, Varma has slashed its listed European holdings to 11% from 19%. That excludes Finnish stocks, a less liquid but fairly stable part of the portfolio, which dropped from 39% to 36%.

The strategy has paid off. Varma's 16.4 billion euros ($18.3 billion) of listed equity investments returned 18% in the first three quarters of the year, beating all other corners of the portfolio.

Rytsola says he worries that the ECB “is running out of ammunition.” He also says that German unwillingness to provide a fiscal boost is “one of the biggest problems here and the main difference between the U.S. and Europe.”

Scholz Says Germany Will Act if Crisis Hits -

German Finance Minister Olaf Scholz has outlined his proposal to break the deadlock on European banking union at Bloomberg's Future of Finance event in Frankfurt. Germany is ready to consider some form of joint deposit insurance, something that would “significantly enhance” the resilience of national systems, Scholz said. He is among the speakers at the Bloomberg conference, along with Felix Hufeld, president of German financial regulator Bafin.

Even ECB bond purchases are likely to have a muted effect on the market, mostly because the “universe of bonds they are able to buy is getting more limited,” Rytsola said.

In the short run, asset managers have generated “superb” returns from years of loose monetary policy, he said. But in the long run, the measures haven't revived growth, “especially not inflation.”

“The multiples are much lower in Europe than in the U.S.,” Rytsola said. But if the growth outlook were to improve, “it would encourage” asset managers to return to Europe, he said.

To contact the reporter on this story: Leo Laikola in Helsinki at llaikola@bloomberg.net

To contact the editors responsible for this story: Kati Pohjanpalo at kpohjanpalo@bloomberg.net, Tasneem Hanfi Brögger

©2019 Bloomberg L.P.