Investors chase European equities, dump U.S. as election nears

In this news, we discuss the Investors chase European equities, dump U.S. as election nears.

(Reuters) – Fund flows to European equities have surged in recent months, the data has shown, as global investors seek to diversify away from U.S. equities amid fears of higher valuations and caution before the presidential elections.

Morningstar data showed that inflows to European stocks were $ 57 billion in the third quarter, compared to an outflow of $ 135 billion from US stocks.

Chart: Flows to US and European equity funds

US stocks have rallied this year, fueled by a surge in tech stocks and economic stimulus, while European stocks have lagged.

This underperformance could now bolster European stocks, as investors seek cheaper, quality stocks outside the United States, analysts said.

“The outcome of the US election could have dramatic and far-reaching impacts, the magnitude of which is unclear. With this in mind, it stands to reason that investors might see Europe as a more favorable destination for their risk assets, ”said Jared Leonard, investment specialist at Hartford Funds.

“For investors who think that these performing US stocks could be in bubble territory, this is just another reason to reallocate risk to European stocks,” he added.

Investors are wary of the possibility that US President Donald Trump will challenge the election result in the event of a loss, which could lead to market turbulence. Trump is lagging behind Democrat Joe Biden in his re-election bid, opinion polls show.

According to data from Refinitiv, the 12-month forecast price-to-earnings ratio of US stocks is 23.6 times higher than 17.3 in Europe. European stocks also offer a higher dividend yield of 2.6%, compared to 1.5% in the United States, according to the data.

Chart: PE ratio of US and European equities

Chart: dividend yield on US and European stocks

“The weak dollar and the rising euro have boosted European asset returns for foreign investors,” said Vincent Deluard, macro-global strategist at StoneX Group.

“European valuations are much cheaper than in the US, and I would say European companies have a similar or better outlook than US stocks (excluding FAANMG, which is in a league of its own),” he added, referring to the most successful American technologies. stocks: Facebook, Amazon.com, Apple, Netflix, Microsoft and Google’s proprietary Alphabet.

Optimism over European stocks could be hampered by a second wave of the coronavirus outbreak, however, with Germany, France, Britain and others announcing preventative measures, including curfews and limits on private gatherings.

But some analysts said the impact on the region’s economy would be limited this time around.

“As Europe and the UK continue to tackle the second wave of COVID-19, we don’t expect further widespread and prolonged lockdowns,” Citi said in a report.

“There are probably more (stimulus) measures to come from governments and central banks.”

Graphics by Gaurav Dogra; Editing by Mark Potter

Original © Thomson Reuters

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