ANNOUNCEMENT: Expert Investor is now PA Europe. Read more.

Investors buy EM, sell European equities

Selling European equities and buying global emerging market stocks is developing into the great trend of 2016.

Enthusiasm for emerging market equities has continued to increase over the summer. A record six in 10 European fund buyers now plan to increase their allocation to the asset class during the next 12 months, according to Expert Investor’s latest asset allocation sentiment data. This is up from 40% in June and about one-third in March.

Appetite is strong across the board, with those intending to increase exposure outnumbering those planning a decrease in every European country. Never before have we seen such widespread enthusiasm for emerging market equities. The share of survey participants intending to decrease their exposure has sunk to a record low of 3%.

The buoyancy of emerging market equity sentiment has begun to feed through into fund flows as well: emerging market equities saw €5.3bn in net inflows in July, which is the highest monthly figure since January 2013, followed by another net €5.1bn in August.

Almost all of this money poured into active funds, despite all the talk about EM equity ETFs.

So where does all this money come from? If you are an avid reader of Expert Investor, you should know the answer. If not, the chart below will give you a clue. As we noted back in 2015 in this magazine, each time when there is an uptick in interest for emerging market equities, this coincides with appetite for European equities fading away – and vice versa.

Sea change in sentiment

It’s no different this time around. When emerging market equities finally started to recover at the start of the year, after a long spell in our bad books, the popularity of European equities started to drop. The asset class is in the midst of a post-Brexit storm, recording net outflows of €17.7bn in July, an all-time low.

During the past seven months, passive and active European equity strategies have seen a whopping €58bn in total net outflows. It is remarkable how quickly investor sentiment towards the asset class has changed: European equities saw €63bn in net inflows during the previous seven month-period.

The decline in investor sentiment towards European equities has similarly fallen to its lowest level since the European sovereign debt crisis in 2011. Just a quarter of survey respondents are now intending to increase their exposure to European equities. As recently as December last year, this figure was twice as high. However, the share of fund buyers who plan to decrease their exposure remains low, at a mere 10%.

This suggests European investors are not sure what to do with their allocations to European equities. This is also reflected in their macroeconomic outlook, which tends to echo their expectations of the European economy.

The default macroeconomic outlook has changed from positive to neutral this year. Few investors are negative, and it is therefore likely that the pace of the outflows will slow, unless another political crisis erupts in Europe.

An obvious one would be the Italian constitutional referendum, to be held this December. And investors will no doubt keep a close eye on the ECB over the coming months as well, to begin today when the ECB holds its long-anticipated October meeting.    

MORE ARTICLES ON

  • Can M&A and buybacks breathe life into UK market?

    Can M&A and buybacks breathe life into UK market?

    Both buybacks and M&A should help realise value in UK shares, boosting prices and giving investors another reason to consider the UK stockmarket Not only does M&A activity appear to be picking up, with a high-profile bid for UK electronics retailer Currys, but the scale of company buybacks continues to accelerate. If it goes well,…

  • Capital Group launches multi-thematic Article 8 funds

    Capital Group launches multi-thematic Article 8 funds

    Capital Group has launched a set of multi-thematic sustainable funds that are available for investors in Europe, writes Christian Mayes. The Capital Group Sustainable Global Opportunities fund (LUX) will invest in global equities, while the Capital Group Sustainable Global Corporate Bond fund (LUX) will target fixed income exposure. The launch also includes a multi-asset offering…

  • Bond funds pull in €29.7bn in January – LSEG

    Bond funds pull in €29.7bn in January – LSEG

    Bond products were the best-selling asset class in January, according to LSEG Lipper’s European Fund Flow report, writes Christian Mayes. The asset class pulled in a net €29.7bn in the month, while Money Market USD grouping was the best-selling Lipper Classification after receiving €11.2bn inflows. Providers of mutual funds pulled in €22.5bn, while passives saw net…

  • Quarter of Article 8 funds at risk of greenwashing – MainStreet Partners

    Quarter of Article 8 funds at risk of greenwashing – MainStreet Partners

    A quarter of all Article 8 funds could be accused of greenwashing based on their sustainability framework and practices, according to MainStreet Partners, writes Christian Mayes The 24% of funds classified as a greenwashing risk by the 2024 ESG Barometer report marks a four percentage point increase from the 20% flagged at the end of…

  • EU green rules could stymie decarbonisation projects – ExxonMobil

    EU green rules could stymie decarbonisation projects – ExxonMobil

    The European Union’s climate regulations may lead to it halting its investments in Europe, ExxonMobil has warned. Speaking to the Financial Times, Karen McKee, president of the product solutions division, said the oil and gas giant had struggled to begin decarbonisation projects in Europe due to the regulatory burden. The result, she added, was that…

  • ICE flags need for Europe to double green investment

    ICE flags need for Europe to double green investment

    Investments to modernise energy and transport must double by the end of the decade to reach 2030 climate targets, the EU has been warned. According to the Institute for Climate Economics (ICE), which has released the European Climate Investment Deficit report, the bloc lacks what it calls a “consistent tool” to ensure monitoring of the…