Investors turn from US to European stocks
Fund flows into continental equities highest since Macron victory in France
Flows into European stocks surged to their highest level since Emmanuel Macron clinched victory in French elections in May, providing further ammunition to continental equities as interest in US stocks fades.
Investors added more than $3bn to dedicated European equity funds in the week to July 19, lifting inflows for the year to more than $26bn, according to data provider EPFR.
With the backdrop of a quickening economic recovery — providing central bank policymakers an opening to debate when to reduce stimulus measures — sectors typically tied to faster growth have regained an edge in Europe. Shares of banks and basic resources companies on the pan-European Stoxx 600 have outperformed healthcare and utility groups since the start of July.
The acceleration of inflows to the asset class follows a torrid 2016, when investors withdrew more than $100bn from European stock funds as deflationary fears roiled markets and voters in Britain voted to leave the EU.
Brian Singer, head of dynamic allocation at William Blair, said that European markets were “attractive”, pointing to “benign” risks as the French election and other political challenges receded in the rear-view mirror.
The investor shifts preceded a closely scrutinised meeting of the European Central Bank on Thursday, where president Mario Draghi struck a dovish tone and said that the “last thing the governing council may want is an unwanted tightening of the financing conditions that . . . may even jeopardise [the recovery]”.
Mr Singer added: “The 800lb gorilla in markets is central banks . . . if you are influencing interest rates then you are influencing asset prices and the market cannot function efficiently with that in play. Our sense is that the 800lb gorilla is beginning to lose some weight.”
The additions to European stocks contrasted with the fifth straight week of redemptions from US equity funds. Investors withdrew $840m in the week to July 19, buoying outflows since late-June to nearly $20bn.
While benchmark stock indices in Germany, France and Spain have lagged behind the US S&P 500 index over the past month, some of the divergence owes to a resurgent euro. In dollar terms, the French CAC 40 and Spanish Ibex 35 are both ahead of the US market over the same timeframe, while the German Dax trails it by less than a tenth of a percentage point.
One corner of US stock markets still favoured by investors is the technology sector, which enjoyed two consecutive weeks of inflows for the first time in a month. Investors added $119m to the asset class last week, lifting inflows this year to $9.3bn. That has helped propel the S&P 500 tech sector to new highs this week, eclipsing a record set at the peak of the dotcom boom of the early 2000s.
As Washington continues to grapple with policy gridlock and many of the pro-growth policies President Donald Trump proposed remain stalled, investors were looking at stocks that could generate higher returns in those straightened circumstances, said Michael Arone, chief investment strategist at State Street Global Advisors.
“Investors are zeroed in on growth at a time when it is lacking,” he said. “And one of the few sectors able to generate it is tech.”