U.S. Investors Have Capitulated on Europe at the Worst Possible Time

  • U.S. traders withdraw money from euro-area ETF for fifth week
  • Euro Stoxx 50 heading into bull market since February low

U.S. investors in European shares have capitulated at the worst possible time.

They pulled $1.6 billion from the iShares MSCI Eurozone ETF in the past five weeks, including the biggest withdrawals since 2014. But the outflows gained traction just as the region’s shares bottomed in mid-February, with traders missing out on a 15 percent rally for the Euro Stoxx 50 Index since then.

The skepticism may be traceable to December, when investors who piled into the fund were stung as stocks fell 20 percent over two months. Even prospects for increased stimulus heading into last week’s European Central Bank meeting did little to encourage risk-taking, with U.S. investors unwilling to jump back into the region’s shares.

“If you felt confused about the selloff, then you wouldn’t want to trade the rebound,” said Thomas Thygesen, SEB AB’s head of cross-asset strategy in Copenhagen. “Markets looked out of control and there was a lot of distrust in the ability of central banks to avoid a recession. But if the Fed tells us they can wait for the next rate hike, then that’s the last ingredient we need for confidence to make a comeback.”

Investors will eventually come back, according to Thygesen. After the longest streak of weekly gains in a year, the Euro Stoxx 50 closed at a two-month high on Monday, trimming its annual losses to 5.4 percent. That’s from a plunge of as much 18 percent at its low on Feb. 11. There are signs anxiety is receding -- a gauge of volatility expectations for the index has dropped 40 percent since its February peak, reaching its lowest level of the year.

The Euro Stoxx 50 fell 0.8 percent on Tuesday.

Still, the ride up hasn’t been easy, with daily moves in the Euro Stoxx 50 reaching an average of 1.5 percent this year, the most since 2008. Last week’s reaction to a greater-than-expected boost in ECB stimulus exemplified the nervousness, with the gauge posting its biggest intraday swings since August, and the largest on an ECB day since 2011.

The outflows from the iShares exchange-traded fund are just part of the picture. Fund managers withdrew $3.3 billion from European equity funds in the week ended March 9, taking money out for a fifth straight period, the worst outflows since October 2014, according to a Bank of America Corp. note dated March 10.

Central bank events haven’t been triggers for long-lasting rallies in recent months. The December selloff in European shares began shortly before ECB President Mario Draghi underwhelmed investors by failing to ease monetary policy as much as speculated. Federal Reserve Chair Janet Yellen spurred anxiety when she said on Feb. 10 that weakening stock prices pose a risk to the economy.

Saxo Bank A/S’s Teis Knuthsen says the concerns that ignited the recent selloff haven’t gone away, with European economic data falling short of projections amid the worst earnings disappointments since at least 2007, while analysts keep slashing estimates for corporate profit growth.

“People just don’t trust Europe’s economic recovery, especially because the risk of a more pronounced slowdown remains in place,” said Knuthsen, chief investment officer at Saxo Bank’s private-banking unit in Hellerup, Denmark. “Earnings don’t look that great here. You can’t justify that when you have QE, the low euro and -- unlike the U.S. -- profits haven’t been growing. That’s a fundamental concern.”

While the Euro Stoxx 50 is catching up to strategists’ year-end forecasts, it would still need to gain another 8.3 percent to reach the average target. Otto Waser at R&A Research & Asset Management says improving sentiment regarding China and stabilizing oil prices will support the rebound for now, but agrees that investors who have been cautious to join in early will want evidence of a new catalyst for the next leg up.

“We are not going to see the low points we saw in February again, that’s behind us,” said Waser, R&A’s chief investment officer in Zurich. “But we need some fresh news that could drive us higher. We still hope we get some better fundamentals for Europe -- earnings trends have been disappointing. That’s essentially the missing bit.”

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