More recently, Europe-focused ETFs listed in the U.S. saw large inflows and flows from U.S. investors to European stocks have been tilted in favour of the latter since the new year. Why are those outside Europe now buying in?
Value is part of the answer: after five years of stellar performance, valuations in the U.S. have risen too; and by a greater extent than their underperforming European equivalents. So by now on most measures of “value” Europe certainly looks “cheaper” than the U.S.
But it is not just U.S. value investors who are attracted. The considerable fillip to the U.S. markets provided by tens of billions of monthly bond purchases by the Fed’s stimulus program looks likely to be wound down by the coming October; interest rates are predicted to rise shortly thereafter. The ECB has so far only provided oral guarantees supporting the Euro (“whatever it takes”). And while the ECB does not look set to make a surprise announcement of anything like the U.S. program; the prospect of deflation has brought on more bullish talk. The ECB has also relied less on signalling their intentions than the Fed, a consequence of which is greater uncertainty.
Judging by the experience of Japan and the U.S., expanded fiscal stimulus in Europe will likely boost the equity markets in its wake. Those investors who won’t “fight the Fed” – and those flocked to Japan early last year – will be watching Europe closely. It is impossible for us to predict who will do better out of Europe or the U.S. over the next five years. But we can certainly understand why U.S. investors are looking to Europe at present.
Ultimately, the role and composition of pan-EU institutions impacts the demand from international investors for equity markets in the region.The winners of the 2009 elections, still reeling from a financial crisis, were shortly served a potent cocktail of challenges to the integrity, currency, credit and economic future of the region via the Eurozone crisis. The challenges ahead will hopefully not prove equally testing, but for their impacts on the financial markets alone, these elections may well prove important.
This article was written by Tim Edwards, director, index investment strategy, for S&P Dow Jones Indices.
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