Europe News

European stock funds gather momentum as inflows cross all-time record high of $6 billion


European equity funds have seen a total of $6.1 billion worth of inflows in the past week, marking the highest on record, according to data tracking firm EPFR.

This is the first time that flows into European equity funds have crossed the $6 billion mark since EPFR started tracking the data in 2000. Of the total $8.8 billion invested in global equities, EPFR data shows a total of $6.1 billion poured into European stock markets, $2.4 billion into U.S. equity markets and the remaining in other markets.

Analysts have attributed this investor optimism to Emmanuel Macron's win in the French presidential election. In a research note from Bank of America Merrill Lynch, analysts argue that flows into European equities have rebounded but have plenty of room to recover.

"US listed European equity ETFs have seen flows recover c45 percent of the outflows in 2016. Similarly, overall inflows to European equity funds are now $15bn, which is still modest versus $103bn outflows in 2016 - but this week did see the biggest inflow on record ($6bn). The pace of inflows doesn't yet flash red for contrarians either: flows as a % of AUM are at most half the way to levels that coincided with market peaks in prior years," BAML said in a note.

BAML further explains that the bull market in European equities is in full swing and there is scope for further upside from a fundamental and valuation perspective.

Meanwhile, analysts at Deutsche Bank have argued that the investor enthusiasm seen in the aftermath of Macron's first round victory in the French presidential election did not repeat in the run up to the second round but European equity funds still saw inflows.

"With the French election out of the way, the European political risk pipeline now looks quite benign, and we expect international fund investors to re-engage with Europe on the back of this," Deutsche Bank analysts said in a note. "In the six inflow spells for European equity funds since 2004, we observed that on an average cyclical sectors like autos and capital goods outperformed while defensives and energy suffered."

Leader of 'En Marche!' Emmanuel Macron wave to supporters after winning the French Presidential Election, at The Louvre on May 7, 2017 in Paris, France.
Patrick Aventurier | Getty Images

Fading political risks and robust earnings

Investors have been seeing more value in European equity markets as compared to the U.S. markets lately due to political certainty after Macron's win. Add to that a robust recovery in corporate earnings in the first quarter of this year and fading political risks are drawing global investors back into the region's stock markets.

In the United States, uncertainty around Trump's tax reforms and the much-awaited fiscal plan has investors feeling impatient.

Earlier this week, Jeffrey Gundlach, the chief executive of DoubleLine Capital, said that European and emerging markets equities are more attractive than U.S. equities.

"I'd rather much be overseas than in U.S.," Gundlach said in an interview. "That's how I felt all year. Part of that was I felt — and it's fading a little bit but it's still a narrative - that the reason people were so bullish on the U.S. is a) it had done really well from 2011 b) they believed the dollar was going to go up a lot more. And I disagreed."

A journalist looks at the Intraday Price Chart showing London's FTSE 100 Index.
Daniel Sorabji | AFP | Getty Images

Market volatility has been at historic lows this week. After the French presidential election, the CBOE volatility index fell to its lowest level since 1993. While this is interpreted by many as a measure of positive times ahead for the market, a number of analysts have warned that this may not last very long as volatility does not stay at low levels for prolonged periods of time.

The volatility index was seen to hit single digit lows after Macron's victory over the weekend. Global stocks got a boost but safe-haven currencies such as the and the Swiss franc suffered but analysts warned against taking huge risks in this quiet market.

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