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European equity inflows reach 18-month high

European equities have been in the spotlights for a while, and finally interest is translating into real flows, according to Morningstar data. But there is a caveat to the optimism, which manifested itself last week.


PA Europe

The asset class has gained momentum since Emmanuel Macron’s convincing victory in the French presidential elections, with net inflows topping €4.6bn in May, the highest since December 2016. 

Haunted by the memories of Brexit and Donald Trump’s surprise election into the world’s highest political office, investors were not all so sure France would resist electing a populist anti-establishment politician. While European equity sentiment had been boosted by positive earnings reports and good macro data out of the eurozone, investors remained hesitant about committing money to the asset class.

“We had tactically reduced our European equity exposure before the first round of the French elections, worrying about the remote possibility of a victory for one of the extreme candidates [Le Pen and Mélenchon],” Alessandro Viviani, a fund analyst at Old Mutual Wealth in Milan, told Expert Investor.

But when that hurdle was cleared, with Macron emerging from the first round as the clear frontrunner, European equity indices surged and flows started to come in (see chart above).

Macron’s (impending) election indeed was the long-awaited sign for Viviani to increase exposure. “We increased our exposure again in line with the benchmark after the first round of the French elections,” he added.

Broad-based confidence

Confidence in European equities looks broad-based: in all European countries, those planning to increase allocation to the asset class are in the majority. Even in Norway, a country where investors tend to take a more global view when it comes to allocating equities, there is significant appetite for a bet on Europe,

“From time to time, we take regional equity allocation bets, and right now we have an overweight in Europe,” says Arild Orgland, managing partner at wealth manager Industrifinans in Oslo. “Europe is interesting. Stocks are still at sensible valuations, and we have finally seen earnings upgrades across the board.”

Brexit impact

However, there is an unprecedented contrast between Pan-European equity flows and country-specific flows that has seldom been as pronounced before, and can partly be explained by Brexit: Europe ex-UK equity funds saw their highest ever net inflows in May, at €1.9bn, while UK equity fund registered net outflows of €1.4bn during the same month.

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