For months, European stocks have outperformed their American counterparts, defying the traditional narrative of “American exceptionalism.” This trend has been driven by real investor interest, with many analysts now asking about Europe’s prospects. The latest fund flow data confirms this shift, with over $10bn flowing into western European equity funds in 2023 alone.
The most recent week saw a record $4bn invested, the highest in three years, according to EPFR Global. This marks the longest streak of inflows since mid-2021 and signals a significant change in investor attitudes towards Europe.
Analysts at Barclays point out that the initial rally was driven by relief as tariffs were seen to be less damaging than expected, as well as hopes for a ceasefire in Ukraine. However, real money investors remain skeptical about the region’s growth prospects, citing weak growth backdrops.
The recent surge in equities and bond yields suggests a “regime change” in Europe, with news of fiscal reforms and increased defense spending from Germany driving the move. Proposals include a EUR500bn infrastructure fund and debt brake limit reforms. The European Central Bank has also signaled support for monetary policy, albeit at lower rates.
If these proposals come to fruition, it could reignite domestic growth in Europe, leading investors to rebalance their portfolios towards the region. This shift would mark a significant departure from the past two decades of “US exceptionalism” and potentially drive valuations above average.
Source: https://www.ft.com/content/4990eacc-b66b-4da8-999b-9d5c5c26feae