SocGen Cracks Paradox of Rallying Market's $200 Billion Outflow

(Bloomberg) -- How do you square a $200 billion investor exodus with a rallying European stock market? Societe Generale SA strategists say this paradox is structural.

Judging purely by asset flows, one would think there’s little love for European equities, given the constant redemptions from the region’s stock funds. At the same time, market gains have pushed up the value of Stoxx Europe 600 Index members, adding as much as $1.5 trillion this year alone. SocGen strategists led by Roland Kaloyan attribute the dichotomy to money managers switching from regional to global stock funds, giving them exposure to European equities, but as part of an international portfolio.

“The trend in asset management industry is that funds are exiting traditional regional funds dedicated to the U.S. and Europe and reallocating to global funds,” said Kaloyan by phone.

The shift away from regional to international funds in the past three years -- resulting in withdrawals of $200 billion from European stock funds in the period -- is expected to continue as asset managers focus on getting exposure to global industry leaders as opposed to specific geographic locations, according to Kaloyan. He believes that future exchange-traded and mutual funds will need to be predominantly global to attract investor appetite.

SocGen recommends staying away from small-cap European stocks since this segment is less liquid and more sensitive to fund outflows than larger companies.

“In global funds, investors get exposure to large multinational European corporations. This year’s rally has been driven by quality names and it was driven by global portfolio managers, not regional ones," said Kaloyan.

The switch from regional funds to global ones also leads to a reassessment of sector valuations, according to SocGen, as stocks that looked expensive within the European equity universe -- such as consumer staples -- no longer do so within the global space.

--With assistance from Sid Verma.

To contact the reporter on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Namitha Jagadeesh, Monica Houston-Waesch

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