Trading volumes surge for European stocks, more to come
* Flows into European equities turn positive for the year
* Falling correlations within market benefit stock pickers
* H1 2013 volumes up 22 pct vs H2 2012 -Market Share Reporter
LONDON, July 25 (Reuters) - Trade in European equities grew by nearly a quarter in the first half of 2013 and should stay buoyant as a growing focus on individual companies lures new investors encouraged by signs of economic stability.
The fresh inflows into European stocks may cement recent gains in leading stock indexes and some of Europe's banks have already followed U.S. peers in reporting increased profit from trading.
Recent upbeat economic data and the European Central Bank's commitment to accommodative policy, in contrast with U.S. Federal Reserve plans to scale back stimulus, helped tip fund flows into European equities into positive territory for the year this month at the expense of bonds, EPFR data shows.
"We are seeing it in terms of capital market activity, we are seeing it in stock exchange activity, we are actually seeing it in the fund flows data as well ... with substantial inflows into equities," said Ian Richards, strategist at Exane.
"So you are starting to see the validation of the rotation trade that people have been calling for a long time (from bonds to equities) ... and that bodes well for the sustainability of the advances that we are seeing at the headline index level."
Trading volumes in the first six months of 2013 were up 22 percent versus the second half of 2012, according to Thomson Reuters Market Share Reporter. Separate data from Markit showed inflows into active funds picking up alongside those into index-tracking exchange-traded products (ETPs).
Banks are benefiting. Credit Suisse reported on Thursday a 24 percent jump in second quarter equity sales and trading revenues versus the previous year, citing higher client activity and improved market conditions.
The surge in activity chimes with strong equities performance at some Wall Street banks, and comes despite the sector's complaints about the hit to volumes from transaction taxes in France and Italy.
With economic concerns abating, new investors are starting to buy and sell shares based on company-specific factors rather than treating the whole market as one. And as others continue to trade indexes, overall volume is rising.
After rising in June, when worries about a reduction in the Fed stimulus that has lifted markets across the world spooked investors, stock sectors have become less inclined to move in lock-step
The same is true for individual shares as investors become more discriminating
That trend is likely to be exacerbated as the results season highlights differences between companies.
In the past two weeks, as the earnings season began, 408 of the STOXX Europe 600 shares have risen and 189 have fallen, compared with 562 and 36 in the previous fortnight, Thomson Reuters Datastream shows.
On Thursday, Dutch staffing firm Randstad rallied after its profits beat forecasts, while shares in French tyre maker Michelin dropped as its earnings fell.
"There is a decrease in correlation at the regional level, at the sector level and at the stock level," said Nigel Bolton, head of European equities at BlackRock.
"This provides an opportunity for smart active managers to make money, so this is a good environment not only for people to come into equities but also to move into active equities ... We've seen an acceleration of inflows into active equity funds."
Ronny Claeys, senior strategist at KBC Asset Management, said he was paying increasing attention to picking stocks rather than investing in the broad market.
"Relative to passive investments strategies, the active investment will lead to higher volume because of higher frequency of transactions."
Active funds are run by managers rather than automatically tracking an index.
Investors eager to play this theme could buy implied volatility on individual stocks, effectively betting that those shares will move sharply without predicting the direction.
Stocks on which options look cheap relative to historical earnings moves include aerospace group EADS, oil firm ENI, energy group ENEL, insurer AXA, lender Unicredit and utility RWE, according to BNP Paribas research.
More trading in turn means more liquidity and a more friendly environment for investing.
"When volumes pick up significantly, that tends to signify that there is more institutional money coming back in," said Neil Marsh, strategist at Newedge. "Overall it's an indication that things are improving a little bit."