A historical analysis of EIE data shows that there is a strong inverse correlation in buying patterns between European equities and emerging market stocks, which is in place since the beginning of 2013. The remarkable trend is noticeable in most European countries, but is most pronounced in Germany, Norway and Spain, and it is only getting stronger: the correlation between European and EM equities was negative in each quarter of last year for all of the three countries.
In the fourth quarter, the share of European equity buyers increased by 13 percentage points to 50% on a Pan-European basis, while the number of EM equity buyers tumbled from 53% to 32%. The EM-to-Europe sentiment shift was most pronounced in Germany. The percentage of fund selectors who said they would increase exposure to European equities increased threefold to 48%, while the number of EM equity bulls tumbled from 57% to 23%.
The Swiss exception
Switzerland is the exception to the rule: it’s not only the odd one out when it comes to monetary policy, the country’s fund selectors also defy the European trend when it comes to equity asset allocation. While EM equity sentiment plummeted in most countries in the fourth quarter of 2014, it reached a record high in the Alpine country. On the other hand, European equity sentiment decreased over the quarter.
But the overall European trend is remarkably strong: European equity sentiment was on the up during the whole of 2013, while the number of EM equity buyers was on a steady downward trajectory. Fates reversed in the first half of 2014, to then flip again in the past six months.
Does performance explain it all?
So how can this all be explained? Part of the answer seems to lie, quite naturally, in the equity markets. During 2013, European equity markets made a strong recovery, which resulted in growing fund selector faith in the asset class. During the same period, the MSCI Emerging Markets Index made a loss of almost 7%, translating into steadily declining sentiment.
In spring 2014, EM sentiment strongly increased as the global economy was improving and valuations were attractive. The asset class indeed had a few strong months, but then went into decline again in September amid increased market volatility. Sentiment followed suit.
But why this interconnectedness between Europe and EM? There is no clear-cut answer to this question, but the most obvious clue is that they have been the most volatile asset classes during the past two years, especially compared to US equities. This has made them the most obvious candidates for an allocation change.