European equity funds are suffering one of their longest streaks of uninterrupted selling since the financial crisis, underscoring the sharp reversal in global investors’ interest in the region.
Sluggish earnings, a swathe of political risks on the horizon that have held back corporate spending and the hit from commodities and emerging markets have created the perfect storm for European equities.
Even if some of these factors are resolved, such as Britain voting to remain in the European Union, others seem set to continue dragging on the asset class. The European Central Bank may end up as the only source of relief in the short term: it does not yet buy equities under its stimulus programme but some analysts think it might have to.
Stocks in Europe, along with Japan, were the top destinations for global equity investors over the past three years as aggressive central bank easing, cheap valuations and hopes of a growth pick-up attracted a flood of money, particularly from the US.
Investors are now facing a reality check. Earnings growth in Europe, in particular, has remained elusive while near-term risks - which include Britain’s June 23 referendum on whether to quit the EU - have slowed business activity.
First-quarter earnings from top European firms fell more than 11% while sales dropped 7%, data from Thomson Reuters I/B/E/S shows.
Bank of America Merrill Lynch said European equity funds have suffered 15 straight weeks of outflows, with year-to-date redemptions totalling $32.2bn. Last year the funds pulled in more than $110bn.
UBS said funds had seen their longest period of outflows since 2008.
“Given the headline macro risks and the generally low to weak economic growth rates around the globe, some of which are more centred on Europe, it is no surprise that Europe is on the losing side of the flow data,” Nate Thooft, US-based co-head of global asset allocation at Manulife Asset Management, said.
US-based investors, big buyers of European equities over the past three years, are no longer as enthusiastic.
Goldman Sachs said heavy buying in recent years means US investors are no longer under-invested in Europe and are likely to be particularly sensitive to economic news and earnings data.
Earnings in Europe have fallen in three of the last four years and for 2016 forecasts are already calling for zero growth. Meanwhile valuations, while not rich, offer little solace.
European shares trade at nearly 15 times forward earnings, a 22% premium to their average over the past decade. Earnings per share are forecast to grow just 6% over the next 12 months.
The lack of interest in Europe has dampened trading volumes across regional exchanges and dented the market for initial public offerings.
London – traditionally Europe’s busiest stock exchange – has seen just over $2bn raised from listings so far this year, a fraction of the almost $18bn gathered over all of 2015, according to Thomson Reuters data.
With few signs emerging that the clouds over Europe will clear any time soon, reigniting interest in regional equities may once again fall to ECB President Mario Draghi and his bank’s multi trillion euro stimulus programme.
Inflation pressure in the eurozone remaining negligible, so some money managers reckon that large-scale share buying is firmly on the central bank’s menu in its quest to banish the threat of deflation in the bloc.