Investors are flocking out of U.S. equities as the Federal Reserve is set to raise rates and corporate profits lose steam, and rushing into European stocks, set to benefit from a nascent recovery in earnings, a lower euro and more quantitative easing from the European Central Bank.
So far this year, U.S. equities have suffered 124 billion dollars in outflows, while European equities have enjoyed 115 billion dollars in inflows, according to a BofA note dated Dec. 3. The big rotation has been visible in market performances, with the S&P 500 down 1 percent year-to-date while Europe's Stoxx 600 benchmark is up 6 percent and Germany's DAX up 8 percent.
The switch out of U.S. stocks and into Europe will continue in 2016, fueled mostly by the divergence in monetary policy and in the earnings cycle, says Ewout van Schaick, head of multi-asset portfolios at The Hague-based NN Investment Partners.
"There is mounting pressure on U.S. profit margins, and significant scope for expansion in European margins."
On a share-weighted basis, S&P 500 profits were down 3.3 percent year on year in the third quarter, making the earnings season the worst since 2009, according to data compiled by Bloomberg
Investment flows into European equities are just getting back to 2007 levels, leaving room for further investments.
The global economic downturn followed by the euro-zone sovereign debt crisis had prompted investors to slash exposure to European stocks, and it has taken eight years to offset the cumulative 170 billion euros outflow gap created in the aftermath of 2007, data from EPFR Global shows.
"In 2011 and 2012, institutional investors from regions such as Asia and the Middle East cut their exposure to European equities to zero, spooked by the sovereign debt crisis" Amundi global head of equities Romain Boscher says.
"They’re now coming back, and there’s still plenty of room for more inflows."
A stabilization of the euro currency after a big drop in the past two years should also be positive for European inflows in 2016, says Alain Bokobza, head of global asset allocation strategy at Societe Generale.
"Foreign investors won’t have to worry about currency hedging in stock portfolios."