Investors took a breather from European equity funds after pouring $10bn into the asset class since early July, as continental bourses stalled ahead of the Jackson Hole gathering of central bank policymakers.
European equity funds counted $231m of redemptions in the week to August 23, the first outflow in seven weeks, according to fund flows tracked by EPFR. While the outflows are marginal compared to the $1.3tn of assets in dedicated European equity funds, it underlines the cautious tone in markets ahead of a smattering of monetary policy decisions and economic releases over the next few weeks.
“You saw inflows start coming in with a fair bit of what we call ‘tourist capital’ — investors who aren’t really set [on the sector] or haven’t fully researched their view — more index and passive investors going after where they see higher returns or a perceived opportunity,” said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors.
When European equities faltered and a more risk off mentality took hold in recent weeks, those type of flows reversed, he said.
Following the election of Emmanuel Macron in France, investors poured billions into European stock funds. It was a bet after several intense elections that quickening economic growth and central bank stimulus would bolster equity bourses.
Activity has indeed brightened with major economies across the globe growing in tandem. Now, as the European Central Bank debates how to dial back stimulus, investors are questioning if the resurgent euro will dent corporate profits and in turn weigh on equities.
Burns McKinney, a portfolio manager with Allianz Global Investors, noted that the strength of the euro would likely put pressure on the valuations of export-reliant companies.
“At the crux of it, it is all about valuations,” he said. “European stocks have rebounded to a point where [they] trade at a premium . . . to the international [equity] universe.”
The currency shifts have been a substantial component of returns this year and investing in continental equities has proven a boon for US investors who had decided against hedging the euro.
The strengthening euro has pushed the French CAC 40 and German Dax up more than 1 per cent in dollar terms over the past month, compared to a 1.3 per cent decline by the US S&P 500. For the year, stocks in the Euro Stoxx 600 index are up 16 per cent in dollar terms.
“While we think Europe is doing extremely well, it is a more accurate statement that the euro is doing extremely well,” said Peter Andersen, chief investment officer of Fiduciary Trust. “There have been so many geopolitical news items that people have forgotten the lead weight of Brexit . . . so rightfully so the indices in their own currency are reflecting that uncertainty at the same time the ECB has its own problems of trying not to snuff out growth.”
Equity strategists with Morgan Stanley said earlier this week that the euro had “weighed on EU equity performance”, adding that performance had not “been that bad when you adjust for euro strength”.
Investors continued to shy away from US stock funds and pulled $2.6bn from the asset class in the latest week. The outflows, which stretched into the tenth consecutive week, lifted redemptions for US stock funds to $30bn since mid-June.