Move Over U.S., the Stampede Is On for European Equities

  • Europe equity funds saw record inflows amid France relief
  • Inflows don’t yet ‘flash red for contrarians,’ BofAML says

European Stocks Advance for Third Straight Week

Europe has become a magnet for stock funds, attracting a record weekly inflow from investors who see the clouds lifting after populist Marine Le Pen was defeated in the French presidential election on May 7.

Investors poured a net $6.1 billion into European equity funds in the week to May 10, according to Bank of America Merrill Lynch, citing EPFR Global data. The money flowed as centrist Emmanuel Macron defeated euro-skeptic Le Pen in Sunday’s run-off. U.S. equities had $2.4 billion of outflows as the world’s biggest economy lost more of its relative attraction over Europe after the Trump rally stalled.

Having pulled more than $100 billion from European equity funds last year, investors are returning as the economic cycle gathers speed later than in the U.S. and companies are boosting earnings faster.

“Global investors have been so under-exposed to European stocks that the rally sparked by the French election is forcing them to readjust their portfolios,” Day by Day technical strategist and partner Valerie Gastaldy said by phone. “This will bring further inflows. European stocks have been underperforming for 10 years. Now, the next few months will be crucial: this could be the start of a long period of outperformance for Europe.”

A long-awaited profit rebound by European companies is helping. The percentage of positive earnings surprises tracked by Goldman Sachs Group Inc. this year is 54 percent. That’s the highest level for the region since 2009. Upsets remain at a historical low of 16 percent, Goldman Sachs equity strategists including Peter Oppenheimer wrote in a note this week.

Fund-flows are brimming as the Euro Stoxx 50 Index heads for its biggest weekly drop in four weeks, a tension that’s bound to kindle speculation about whether Europe’s gains are nearing exhaustion.

“The pace of inflows doesn’t yet flash red for contrarians,” BofAML strategists led by Ronan Carr wrote in a note Friday. As a percentage of assets under management, the flows “are at most half the way to levels that coincided with market peaks in prior years.”

For a look at Why Macron Beat Le Pen, click on this maps story

Sentiment on Europe “is definitely in bullish territory -- net 40 percent are overweight -- but we are not yet getting definitive contrarian sell signals,” the strategists wrote in advance of the publication of their fund manager survey for May, due next week.

Growth in the 19-nation euro area will be slightly stronger this year than previously predicted, the European Commission said on Thursday. Some risks to the outlook have diminished, the commission said, lifting its forecast for 2017 gross domestic product to 1.7 percent from 1.6 percent. That still falls short of the 2.2 percent GDP increase forecast for the U.S.

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