Billion-Dollar Fund Flows Show Europe Investors Inured to Swings

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Wild rallies and heavy selloffs are no deterrent to investors pumping record money into European equities.

Daily swings in the Stoxx Europe 600 Index have averaged 1.1 percent in August as companies go up and down in lockstep more than any time since the depth of the sovereign-debt crisis. Yet confidence that earnings growth will come through has made investors look past the volatility and pour $1.3 billion into an exchange-traded fund tracking the shares in the past month, including record inflows last week.

“Markets have had a lot of developments to digest -- good news in Greece, bad news from China, and then earnings season giving us surprises in both directions,” said Alex Scott, who helps oversee about $14 billion as Seven Investment Management’s deputy chief investment officer. “Risk appetites have adjusted. With an earnings recovery unfolding, European equities offer the best hunting ground for investors seeking value.”

Concern that exporters will suffer from China’s currency devaluation hit equities earlier this week, just after fading worries that Greece will leave the euro propelled the Stoxx 600 to its biggest nine-day jump since 2011 last month. With companies such as Nestle SA beating sales estimates, the gauge has managed to remain above its low from July 7.

The Stoxx 600 climbed 0.4 percent at 9:21 a.m. in London.

80% Up

On Thursday, the rebound in the region’s benchmark gauge sent about 80 percent of its stocks up, the 37th time so many moved in the same direction in 2015. That put them on track for their most-correlated year since 2011.

As stocks behave increasingly alike, analysts remain bullish on the companies’ fundamentals. They estimate profit at Stoxx 600 members will climb 6.5 percent this year, compared with 0.9 percent for Standard & Poor’s 500 Index members. And with a valuation of 16.5 times estimated earnings, European equities remain cheaper than U.S. peers.

Traders should get used to increased stock swings, at least in the medium term, according to David Hussey, head of European equities at Manulife Asset Management in London.

“Volatility is the result of uncertainty on the global macro picture,” he said. “If it persists -- which is likely -- it will slow the interest rate normalization, which will support equities.”

Fed Policy

As the Federal Reserve prepares to raise interest rates, speculation has risen that officials will delay it after China’s unexpected currency move. On this side of the Atlantic, the European Central Bank is still buying bonds and the euro remains weak against the dollar, helping exporters.

Big equity swings and shares moving in unison will persist until the Fed gives more clarity on its interest-rate increase, according to Guillermo Hernandez Sampere, who helps manage about 150 million euros ($167 million) as head of trading at MPPM EK in Eppstein, Germany.

“There’s more of a macro-oriented trading,” he said. “The people who move the markets are the fast-money people. These people always sit in the same bus, they go the same way. Markets will be calmer as soon as they know the next important event for the rest of the year, the Fed rate hike.”