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Luxembourg’s fund buyers swap US for Europe index trackers

In December, investors in Luxembourg were frantically buying into the Trump rally while enthusiasm about European equities was at an all-time low. Now, their outlook has reversed dramatically.

Passive preference  

When our researcher visited Luxembourg this month, European equities were in great demand. Roughly two thirds of interviewees intend to increase their allocation to the asset class over the next 12 months. That doesn’t mean, however, that European equity fund sales people in Luxembourg can uncork the champagne. They will still be up for a hard sell, because passive exposure is the preferred option in Luxembourg at the moment.

Some believe active managers will once again shine in 2017 as markets return to trading on the basis of fundamentals. But Luxembourg’s fund buyers see it differently. They expect macro tailwinds to push equity markets up further over the rest of this year, as the European economy is accelerating, the ECB remains accommodative and most potential political stumble blocks have (at least temporarily) been removed.

Index trackers have long been preferred in US equities, and interviewees now also increasingly favour passives in EM stocks. Several interviewees said they are looking to diversify their exposure to the asset class by buying single country ETFs.

Several interviewees told our researcher they have been buying European equity ETFs in the wake of the French presidential election, and now that their preferred choice Emmanuel Macron has made it to the Elysée, they are likely to further step up their allocation.

Equity outlook – mostly rosy

Not only European equities, but stock markets as a whole are considered a lot more attractive than half a year ago. Four in 10 interviewees plan to increase their allocation to global emerging market equities, as political risk in the region has diminished. Donald Trump’s bellicose rhetoric against China has eased and erecting tariff walls does not seem an immediate priority of his administration, though that could of course change.

The only equity market where the outlook is not rosy is US equities. Interviewees said they find allocations to US stocks “hard to justify” in the light of current valuations. Donald Trump’s presidency is largely considered a disappointment so far as he is seen to have more problems implementing market-friendly policies than initially anticipated.

Part of the Bonhill Group.