Remember all the talk of American exceptionalism? The argument that the US was the only market you needed to care about, and big US technology stocks were basically the new risk-free asset?
Well about that . . .
Yep, as a lot of people have gleefully noted, European stocks have walloped US equities since the election of Donald Trump. OK OK, yes, sure, things look a little different over a longer timeframe – and as the recent wobble shows, European equities aren’t entirely immune from all the noise emanating from Washington lately – but it’s still a fun development, given the gloom long surrounding Europe and all that “American exceptionalism” chatter last year.
Importantly, this seems to be generating real investor interest, with a lot of sell-side analysts recently mentioning how many questions they’re finally getting about Europe.
And this is now beginning to show up in the fund flow data. Another $4bn flowed into western European equity funds in the week to March 5, the most in three years, according to EPFR Global data, taking this year’s inflows to over $10bn.
This might seems dowdy compared to the titanic sums that regularly go in and out of US equity funds, but it is a sharp contrast to the prevailing investor attitude to Europe over the past decade.
Western European equity funds have now taken in money for four straight weeks, the longest streak of inflows since the mid-2021 stock market mania.
So how long can this last? Who knows. Europe is basically the Tottenham Hotspur of international economics – sometimes promising, occasionally embarrassing, ultimately disappointing and unable to win any prizes since 2008.
However, there does seem to be a tentative but fundamental shift in the vibes lately (in European markets, not in north London).
Barclays’ European equity team say the performance of European stock markets has so far primarily been a “relief rally”, but argue that the recent news out of Germany could be the spark for a regime change. Alphaville’s emphasis below:
EU equity outperformance in Jan-Feb was predominantly a relief rally. Systematic investors closed their short positions on Europe once it dawned that damages from tariffs may not be as bad as feared, while hopes of a ceasefire in Ukraine and boost to EPS revisions from weak FX also helped sentiment. This led P/E multiples in the region to climb back to just above fair value levels, and unwind the Trump risk premium that built up after the US election. But while fast money has turned bullish, real money investors remain sceptical of Europe’s catch up extending much further given the still weak growth backdrop in the region. Ytd inflows so far have not even fully recovered the redemptions seen in Q4 last year.
However, fiscal bazooka from Germany this week and news flow of reforms at the EU-wide level could be a regime change and mark the advent of Europe 2.0. At least, this is what the synchronised surge in equities, bond yields and eurusd suggests. Apart from significantly higher defense spending, the German proposals include a EUR500bn fund to spend on infrastructure and reforming the debt brake limits. Meanwhile, monetary policy remains supportive with ECB lowering rates further by 25bps yesterday, although reflationary fiscal policy may reduce the chances of more easing to come.
Big picture, if some of the Draghi’s proposals and other pro-growth/supply policy measures do become a reality, it could restart the domestic growth engine in Europe and Germany, which has been missing since the GFC. Eventually this could lift growth in Europe above trend, leading investors to strategically rebalance their allocations more towards the region and drive valuations above average. This is something not many are positioned for yet, as US exceptionalism has been the playbook for the last two decades.
In other words . . .