The asset class has gained momentum since Emmanuel Macron’s convincing victory in the French presidential elections, with net inflows topping €4.6bn (£4bn, $5.2bn) in May, the highest since December 2016.
Haunted by the memories of Brexit and Donald Trump’s surprise election into the world’s highest political office, investors were not all so sure France would resist electing a populist anti-establishment politician.
While European equity sentiment had been boosted by positive earnings reports and good macro data out of the eurozone, investors remained hesitant about committing money to the asset class.
“We had tactically reduced our European equity exposure before the first round of the French elections, worrying about the remote possibility of a victory for one of the extreme candidates [Le Pen and Mélenchon],” Alessandro Viviani, a fund analyst at Old Mutual Wealth in Milan, told Expert Investor.
"All the signs now point to a strengthening and broadening recovery in the euro area" - Mario Draghi
But when that hurdle was cleared, with Macron emerging from the first round as the clear frontrunner, European equity indices surged and flows started to come in (see chart above).
Macron’s (impending) election indeed was the long-awaited sign for Viviani to increase exposure. “We increased our exposure again in line with the benchmark after the first round of the French elections,” he added.
Confidence in European equities looks broad-based: in all European countries, those planning to increase allocation to the asset class are in the majority. Even in Norway, a country where investors tend to take a more global view when it comes to allocating equities, there is significant appetite for a bet on Europe,
“From time to time, we take regional equity allocation bets, and right now we have an overweight in Europe,” says Arild Orgland, managing partner at wealth manager Industrifinans in Oslo. “Europe is interesting. Stocks are still at sensible valuations, and we have finally seen earnings upgrades across the board.”
However, there is an unprecedented contrast between Pan-European equity flows and country-specific flows that has seldom been as pronounced before, and can partly be explained by Brexit: Europe ex-UK equity funds saw their highest ever net inflows in May, at €1.9bn, while UK equity fund registered net outflows of €1.4bn during the same month.
UK equity funds were not the only single-country funds to see net outflows in May though: (passive) funds focusing on UK, Swiss, French and German equities saw combined net outflows in excess of €6bn.
At the same time, Pan-European equity funds registered net inflows of €8.3bn, the highest figure since July 2015.
Will these flows continue? If it’s up to Viviani, they will, as he sees the eurozone economy picking up while political risk has decreased. “Therefore, we consider increasing our allocation even further now,” he said.
Last week at an ECB-meeting in Portugal, ECB-president Mario Draghi seemed to share this outlook, saying “all the signs now point to a strengthening and broadening recovery in the euro area.”
But his comment triggered a ‘mini Taper Tantrum’ and sent shares down, as investors started fretting about premature rate rises.
The European equity market therefore isn’t as straightforward a bet as it may have seemed amid the euphoria right after the French elections.