Posted inEmerging MarketsEquitiesEurope

Investors buy EM, sell European equities

Enthusiasm for emerging market equities has continued to increase over the summer. A record six in 10 European fund buyers now plan to increase their allocation to the asset class during the next 12 months, according to Expert Investor’s latest asset allocation sentiment data. This is up from 40% in June and about one-third in March.

Appetite is strong across the board, with those intending to increase exposure outnumbering those planning a decrease in every European country. Never before have we seen such widespread enthusiasm for emerging market equities. The share of survey participants intending to decrease their exposure has sunk to a record low of 3%.

The buoyancy of emerging market equity sentiment has begun to feed through into fund flows as well: emerging market equities saw €5.3bn in net inflows in July, which is the highest monthly figure since January 2013, followed by another net €5.1bn in August.

Almost all of this money poured into active funds, despite all the talk about EM equity ETFs.

So where does all this money come from? If you are an avid reader of Expert Investor, you should know the answer. If not, the chart below will give you a clue. As we noted back in 2015 in this magazine, each time when there is an uptick in interest for emerging market equities, this coincides with appetite for European equities fading away – and vice versa.

Sea change in sentiment

It’s no different this time around. When emerging market equities finally started to recover at the start of the year, after a long spell in our bad books, the popularity of European equities started to drop. The asset class is in the midst of a post-Brexit storm, recording net outflows of €17.7bn in July, an all-time low.

During the past seven months, passive and active European equity strategies have seen a whopping €58bn in total net outflows. It is remarkable how quickly investor sentiment towards the asset class has changed: European equities saw €63bn in net inflows during the previous seven month-period.

The decline in investor sentiment towards European equities has similarly fallen to its lowest level since the European sovereign debt crisis in 2011. Just a quarter of survey respondents are now intending to increase their exposure to European equities. As recently as December last year, this figure was twice as high. However, the share of fund buyers who plan to decrease their exposure remains low, at a mere 10%.

This suggests European investors are not sure what to do with their allocations to European equities. This is also reflected in their macroeconomic outlook, which tends to echo their expectations of the European economy.

The default macroeconomic outlook has changed from positive to neutral this year. Few investors are negative, and it is therefore likely that the pace of the outflows will slow, unless another political crisis erupts in Europe.

An obvious one would be the Italian constitutional referendum, to be held this December. And investors will no doubt keep a close eye on the ECB over the coming months as well, to begin today when the ECB holds its long-anticipated October meeting.    

Part of the Mark Allen Group.