Posted inEquitiesUnited StatesEurope

European investors backed the wrong horse

US equity sentiment has been outright negative for some 18 months now, with investors planning to reduce their exposure consistently outnumbering those intending to buy. Each quarter, there have only been a couple of countries where investors had faith in the asset class. But in none of those, appetite has really stuck. And unfortunately for investors, they indeed reduced their US equity holdings over the period. According to Morningstar’s fund flow figures, net outflows from the asset class from July 2015 to May 2016 amounted to €6.5bn.

Even though US equities generated a 2.5% return for euro investors (and 4% for dollar investors), there is still little love lost between European fund buyers and US equities. Rather than rewarding the asset class for its solid performance, investors feel their reasons not to buy US stock in the first place have just been reinforced, namely that they were overvalued a year ago, and are even more so now. As a result, sellers outnumber buyers by two to 1, about the same ratio as a year ago.  

Misplaced trust

But, oh irony, the asset class most liked by European investors over the course of the past year, European equities, has delivered the worst performance of any asset class over the past 12 months: the MSCI Europe index is down 13.8% since mid-July 2015, with the average fund losing even more (14.8%).

In every European country, those intending to increase their exposure have outnumbered those planning to decrease their allocation, until very recently. This positive sentiment has coincided with strong net inflows, of €34.3bn from July 2015 to May 2016.

Whereas fund buyers have been indifferent about the relative outperformance of US equities, the dismal returns of European stocks seem to have had some impact. European equity sentiment is finally heading downwards, Expert Investor’s latest asset allocation sentiment data suggest.

Less than a third of investors now plan to increase their exposure, the lowest figure since 2011, and sellers now outnumber buyers in three of the 13 countries we survey. It’s too early to speak of a trend, but at least something is changing.

Part of the Bonhill Group.