(Bloomberg) -- Investors haven’t run away from European equities with such speed since early 2017. Could this be a contrarian buy signal?
The region’s equity funds have suffered outflows of about $55.8 billion in the five months through the end of July, the longest streak of redemptions since February 2017, according to data from EPFR Global. Investors have shunned Europe, rattled by political crises in both Italy and Spain, Brexit’s messy talks as well as a dip in European macro indicators.
A tough comparison with the booming U.S. stock market is also to blame, given the absence of red-hot FAANG stocks in Europe and Wall Street’s stellar earnings season for the second quarter, with profits up 24 percent year-over-year.
But this year’s investor exodus has been so sharp that it’s reminiscent of the euro-area debt crisis in 2011-2012, when asset managers fled the region en masse, fearing an implosion of the currency bloc. The brisk outflows in 2018 are more surprising given the region’s relatively healthy economic outlook while corporate earnings growth accelerates, albeit not as quickly as in the U.S.
And European stock valuations remain cheap in relative terms: The Stoxx Europe 600 Index trades at about 1.7 time book , compared with 3.1 times for the S&P 500 Index. “The main thing that is compelling about European stocks is the valuation compared to the U.S.,” said Edward Park, a London-based investment director at Brooks Macdonald.
The outlook for this year and into 2019 is far from bleak for European equities, according to Andrew Milligan, head of global strategy at Aberdeen Standard Investments, which is overweight European stocks. “There is an upside to European stocks, but for that to appear the underlying corporate earnings picture needs to improve,” he said.
The region’s earnings are seen growing a timid 5.5 percent this year, and 9.1 percent in 2019, Bloomberg data show.
The market may need a little boost also from the macro side, said Ulrich Urbahn, head of multi-asset strategy and research at Joh Berenberg Gossler & Co. KG in Frankfurt. “Given the euro’s weakness, I think money will come back to Europe again,” he said. And the boost might be coming indeed: Citigroup Inc.’s Economic Surprise Index for the euro area has started to rebound, a trend that usually suggests gains for the region’s stocks.
One industry in Europe continues to appeal to investors amid the recent outflows: according to EPFR, European equity fund managers have increased their average energy sector allocation to the highest level since 2014, while reducing exposure to consumer discretionary stocks close to a six-year low.
©2018 Bloomberg L.P.
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