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Remember all the stories of American exceptionalism? Was the US the only market you need to worry about, and was the US large tech stocks essentially a new risk-free asset?
About that. . .
Yes, as many people are happy to point out, European stocks have been ramming through US stocks since the election of Donald Trump. Ok, yes, certainly, things look a little different in a longer time frame. And, as recent wobble shows, European stocks are completely unimmunized from all the noise that has been emitted from Washington recently, but given the dark, long Europe surrounding Europe and all the “American exception” chatters from last year, it’s still a fun development.
Importantly, this appears to generate genuine investors’ interest, and many sell-side analysts have recently mentioned the number of questions they have finally received about Europe.
And this is now beginning to appear in fund flow data. Another $4 billion flowed into Western Europe’s stock funds until March 5th, bringing this year’s inflow to over $100 billion, according to EPFR Global Data.
This may seem like Dowdy compared to the amount of Titanic that regularly enters and leaves US stock funds, but it contrasts with the general investor attitude towards Europe over the past decade.
Western Europe’s equity funds are currently robbing money for four consecutive weeks, making it the longest inflow winning streak since stock market enthusiasts in mid-2021.
So how long will this last? who knows. Europe is basically Tottenham Hotspur of international economics. Sometimes, sometimes embarrassing, ultimately disappointing, and have not won a prize since 2008.
However, there appears to be a temporary and fundamental change in the atmosphere (not in the European market, but in the Northern London).
Barclays’ European equity team says that European stock market performance has been primarily “relief rallies” up until now, but it argues that recent news from Germany could be a spark for a change of government. The following alphaville emphasis:
Jan-Feb’s out-of-performance EU equity was primarily at relief gatherings. Systematic investors have closed short positions in Europe. The damage from tariffs may not be as bad as feared, but boosting hopes for a ceasefire in Ukraine and revisions to EPS from weak FX also brought sentiment. This has brought the region’s P/E multiple back just above fair value levels, unlocking the Trump risk premium that had accumulated after the US election. But while fast money has become bullish, real money investors remain skeptical that Europe’s catch-up will expand even further given the region’s still weak growth background. So far, YTD influx has not fully recovered from the redemption seen in the fourth quarter of last year.
However, this week’s newsflow of German fiscal bazooka and reforms at the EU-wide level is a change of government and could mark the emergence of Europe 2.0. At the very least, this is what the stocks have simultaneous surges, bond yields and EurusD suggest. The German proposal includes a 50 billion euro fund to spend on infrastructure and reform debt brake restrictions, apart from significantly higher defence spending. Meanwhile, monetary policy continues to support the ECB’s falling further below 25bps yesterday, but reflective fiscal policy may reduce the likelihood of being more eased.
The big picture could reopen the European and German domestic growth engines that have been missing since the GFC if Draghi’s proposal and some of the other pro-growth/supply policy measures become a reality. Ultimately, this allowed Europe’s growth to surpass the trend, allowing investors to strategically recalibrate their allocations towards the region and encourage above-average valuations. This is not yet in many positions, as US exceptionalism has been a playbook for the last 20 years.
In other words. . .
