The first phase of the euro zone crisis took place between April 2010 and June 2011, when foreign investors pulled back on buying bonds from the area's periphery countries, the Nomura analysts wrote.
"The general trend was one of substitution from the periphery, into the core," they explained.
The second phase started in July 2011 when tensions spread to Italy and Spain, and this "shock to confidence" was followed by a "sharp change" in investor flows, according to the strategists, who said that foreign private investors started cutting exposure not just to Italy and Spain but also to Belgium, France and even Germany.
"This is clear especially from Japanese flow data, which is high quality and an important component of the overall inflow picture," they wrote.
However, they said, there was an offset from euro zone investor behavior during this second phase, as stock market investors in particular repatriated "sizeable amounts of money" to the single currency area. During the bear market in the second half of last year, repatriations of stock market investments exceeded 100 billion euros ($125 billion), according to the Nomura analysts.
The repatriation was not enough to offset the decrease in inflows fully, they explained.
"But it meant that the net deterioration was much less pronounced than inflow dynamics alone would have suggested, and it played a role in containing euro weakness to be more moderate than many had expected," the strategists added.
Pushing Money Abroad
The third phase of the crisis shows a new element: domestic investors in the euro zone starting to "push more money abroad," in a dynamic like the ones in traditional emerging market currency crises, they said.
There are four elements pointing to the start of a capital flight to foreign assets, according to the Nomura analysts.
First, the balance of payments data from the European Central Bank showed outsized foreign fixed income buying by euro zone investors in March, they said.
"This is the third consecutive month of significant foreign bond buying; moreover, euro zone investors also started to invest large amounts in foreign short-dated debt," the strategists added.
Second, there has been a structural break in weekly mutual funds trends in recent months, with data showing unusually strong buying of foreign bonds, especially U.S. and emerging markets bonds, in April, May and June, according to the analysts.
"This is a departure from previous trends, which typically showed repatriation of foreign fixed income assets in bear markets for risky assets," they wrote.
Third, there has been evidence that the Swiss and the Danish national banks intervened "aggressively" last month to fend off strong foreign inflows, while demand for Swedish debt has increased notably, according to the strategists.
"Fourth, the idea of capital flight into non-euro zone markets from euro zone investors fits with the price action in global sovereign bond markets," they wrote, adding that Danish bond yields have seen the largest yield compression and that German, Finnish and UK bonds also stand out for their low yields.
The Nomura strategists, however, pointed out that there was little tangible evidence that euro zone flows went into U.S. Treasurys or that euro zone investors had become meaningful buyers of Japanese bonds. But, they added, capital flow data come with a lag, while leading indicators point to the beginning of a capital flight.
If this dynamic continues, it opens the door to "much more pronounced euro weakness" and investors should watch policy actions over the next three to four months as they will be crucial, they said.