Investors running away from the European stock selloff are hiding in an asset class that yields them nothing.
As the Stoxx Europe 600 Index heads for its first back-to-back weekly losses since the beginning of the year and bond volatility surges, traders are opting to take their profits and wait it out. Cash allocation jumped to a seven-month high, according to a Bank of America Corp. survey.
The most loved among investors only a few weeks ago, European stocks are now being shunned by those who are still waiting to see tangible signs that the region’s central-bank stimulus will lead to earnings growth. Dirk Thiels at KBC Asset Management went underweight equities last week.
“The market is suffering from vertigo -- the gains we achieved by April were unsustainable,” he said from Brussels. “A lot of people jumped on the QE bandwagon and are beginning to realize that that’s not going to take us much further. Nobody ever died from taking profits. At least cash is a security that’s not going to fall.”
Fund managers’ allocation to equities fell to a six-month low globally, while bond investments dropped to the lowest in nine months, a Bank of America survey from May 19 showed. Cash allocations jumped to 21 percent from 3 percent the previous month.
The Stoxx 600 lost 5.2 percent from its record in April through Thursday, posting declines in eight of the past 10 days, the most in such a period since October. After being one of the best, Germany’s DAX Index has become among the worst developed markets this quarter, down 8.4 percent from its peak, as a euro rebound hurt exporters.
Both indexes fell another day on Friday.
“The heroes are tired,” said Tristan Abet, a strategist at Louis Capital Markets in Paris. Still, “the ECB and Federal Reserve will not allow a market crash,” he said.
ECB President Mario Draghi said on Wednesday the central bank will keep going with the promised pace of QE, stressing that the quantitative-easing program is filtering through to the economy as planned.
That doesn’t convince Compass Capital’s Benedict Goette, who says investors should either reduce their exposure to stocks, hedge or switch into cash.
“Equity markets are vulnerable,” said Goette, managing partner of the asset-management firm in Zurich. “More cash would be adequate for now.”