Value trap? Stock bulls grow fearful of Europe backlash
With European stocks at five-year highs and investors pouring money into the continent, some equity analysts are now predicting a pullback.
Recent fund flow data highlights the turnaround Europe has made as it pulls itself out of its worst recession for over 40 years. Bank of America Merrill Lynch indicated last week there have been 16 straight weeks of inflows to European equity funds, which is the longest streak in 11 years.
But Mike Ingram, a market analyst at BGC Brokers, believes that this "Eurotation" could be about to end.
"I get the feeling that we may be in for a little bit of a pullback," he told CNBC Monday.
"If you look at the relative performance of Europe over the last three months versus the U.S., you've seen an 8 percent outperformance in local currency, if you factor in the strength of the euro it's 13 percent."
The pan-European Euro Stoxx 600 Index rallied by 8.5 percent during the third quarter of 2013 as the economic data became stronger for many struggling euro zone countries and valuations of stocks looked appealing against those in the U.S.
Ingram said that this momentum and positioning is one of the reasons for his uneasiness. Political wrangling in the U.S. has also meant investors have used the euro as a safer investment over the dollar, with the stronger currency putting pressure on European companies, he added. The next step-up in European equities would require strong earnings reports, Ingram said, something that he hasn't so far witnessed.
(Read More: European equities looking cheap as recession eases)
"The bottom line for me is that European companies really need to start delivering the goods in terms of earnings. The current (earnings) season and any guidance – such as it is in Europe – will be crucial in determining whether the last three month's outperformance of European markets is set to continue – or shifts into reverse," he said in a research note.
"Certainly it seems to me that need to see earnings momentum reverse in the EU for this trend to continue or 'value' will become 'value trap'."
Meanwhile, Alan Miller, CIO and co-founder of SCM Private is growing equally nervous, saying that the "euphoria" of Europe in the last three months could soon fizzle out.
"I'm starting to get a little nervous about European equities just because every single day I read every single strategist and every single institution has suddenly got incredibly bullish on European equities," he told CNBC Monday.
(Read More: European Equities Have 'Rarely Been So Appealing')
"Meanwhile if you actually look at the amount of stock being sold by directors it's interesting in Europe it has gone up quite a lot in the last few months."
These bearish views add to research by Bank of America Merrill Lynch last week which highlighted that fund managers were so bullish on European equities in the last month that a "contrarian" sell signal had been triggered.
Out of a total of 235 panelists a net 46 percent of asset allocators were overweight European equities in the bank's survey, up from a net 36 percent in September and representing the highest reading since 2007. The results triggered the first "potentially overbought" signal for a region since December 2010.
— CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81