Interview, Conference Presentation
Europe in Vogue: What’s Driving Stronger Flows into European Equity
- European equities underperformed US and global markets for over a decade following the 2008 financial crisis, driven by a 2011–2012 sovereign crisis that heavily impacted financial stocks, which previously constituted a large market segment.
- Long-term structural headwinds included slow economic growth, low inflation, Brexit-related risks, and an underweight exposure to the technology and digital economy sectors compared to the US.
- Sector weighting in European listed equities remains skewed toward financials, commodities, consumer companies, and healthcare, resulting in lower earnings growth and returns during the previous cycle.
- Global mutual fund flows into European equities in the current year represent the strongest performance since at least 2015, driven by both domestic and international investors.
- Year-to-date price performance has matched the S&P 500 and outperformed most emerging markets, supported by rapid vaccine rollouts, loose monetary and fiscal policies, and a swift policy response to the crisis.
- The EU Recovery Fund, conceived in spring 2023 by Merkel and Macron, provides significant fiscal support targeting Southern Europe, with disbursements scheduled to begin in July.
- ESG-focused funds are a primary driver of current inflows, allocating 30% of their assets to European shares despite Europe comprising only 17% of global market capitalization.
- Recent capital flows show a sectoral shift into previously unloved cyclical and value stocks alongside continued strong ESG allocations.
- Foreign investors, particularly the US, now hold nearly 30% of European equities, up from 10% two decades ago, whereas domestic capital remains under-allocated.
- Domestic under-allocation is attributed to pension and insurance firms favoring fixed income over equities, and European households maintaining a risk-averse asset allocation despite post-pandemic savings increases.
- Alternative demand sources for equity are expanding, with private equity activity projected to reach a record full-year level in 2021, alongside rising M&A and buyback activity.
- A critical deficit in previous cycles saw European stock (Stoxx 600) earnings grow only 2% between 2007 and 2019, whereas the S&P 500 earnings grew 87% over the same period.
- Analysts forecast 40–50% earnings growth for European companies this year, which would result in EPS levels 5% above pre-pandemic (2019) levels by year-end.
- Strategic recovery relies on innovation and decarbonization, with analysts estimating that nearly one-third of the European market is now linked to the digital economy.
- Investment strategy for 2021 involves targeting renewables and companies heavily investing in future growth aligned with decarbonization goals.
- The authors express cautious optimism that improved earnings growth and structural alignment with digital and green trends will successfully attract future overseas and domestic capital.