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European investors lukewarm about US equities – but Trump can change that

Over the past 12 months, European fund buyers have pulled out a net €13.6bn from the asset class, with net outflows in all but two months. However, there is no clear trend other than flows being lacklustre. In almost every month, outflows have been limited to less than €2bn.

In fact, US equities (active funds and ETFs combined) have predominantly seen modest net outflows from European investors since the start of 2015. Forward-looking asset allocation sentiment data, as periodically gathered by Expert Investor, show a similar picture. Those intending to decrease allocation to US equities have constantly outnumbered those planning to increase exposure by a considerable margin.

However, many fund buyers have also consistently kept their allocation unchanged, as sound US economic growth and the dollar safe heaven appeal more or less outweigh the downside of high valuations. This has all translated in slowly dwindling allocations to US equities over the previous two-year period.

Wishful thinking?

If Hillary Clinton wins the US presidential elections next week, this pattern is likely to continue as such an outcome is anticipated by investors. Expert Investor’s most recent poll, among fund buyers in the Netherlands, shows a 40%-point lead for Clinton.

A recent poll by NN Investment Partners among European institutional investors revealed an even stronger Clinton-bias. A whopping 84% of those polled said they believe Clinton will win the elections, while only 2% forecast a Trump win. The remaining 14% believe the race is too close to call.  

However, investors tend to expect the outcome they themselves favour: a vast majority of European fund selectors believed Brexit would be bad (for markets), and an equally large majority expected the UK electorate to vote ‘Remain’. We know how it all turned out.

A similar bias could be the problem this time around, as 84% of European investors (the same percentage as those expecting a Clinton win) estimate a Trump presidency would be detrimental to equity markets, according to the NN IP poll.

To anticipate on a Trump win, investors would therefore do wise shorting equity indexes and buy dollars and government bonds, according to WisdomTree, an ETF provider. Despite the tightening of polls this week, a Clinton win is still widely seen as more likely, if only because Trump would have to win all four big swing states (Florida, Ohio, Pennsylvania and North Carolina) to win the presidency.

The odds for Clinton to win on gambling site Betfair.com have doubled this week and now stand at 4/11. This means a Clinton victory would generate a return of 36%. As markets are only expected to jump slightly, putting a few dollars/euros/pounds on Hillary looks like a pretty good way to hedge your bets.

Part of the Bonhill Group.