Global investors are increasingly turning their attention to European equities, driven by a desire to minimize their exposure to the United States and a growing optimism about the region’s economic prospects. February is on track to record the highest monthly inflows into European stocks, following two consecutive weeks that saw inflows of approximately $10 billion, according to EPFR, which monitors ETF and mutual fund activities.
The Stoxx Europe 600 index has recently surpassed several record highs, mirroring similar bullish trends seen in indices across the UK, France, and Spain. This shift comes as many investors seek to diversify from the volatility plaguing Wall Street, particularly concerning a potential AI bubble that has raised alarms within the technology sector. Sharon Bell, a senior equities strategist at Goldman Sachs, noted that this trend is particularly pronounced among US-based investors, who see European markets as a more appealing alternative due to their lesser focus on tech stocks.
Investor interest in “old economy” sectors such as banking and natural resources has propelled European markets, with the UK’s FTSE 100 rising nearly 7% this year. Stocks such as Weir Group and Antofagasta have experienced gains exceeding 20%. These shifts indicate that investors are diversifying their portfolios to avoid an overreliance on expensive AI-centric stocks.
As diversification becomes a key strategy, various global markets are showing strong performance, outperforming Wall Street. The S&P 500 index currently ranks 76th out of 92 major benchmarks monitored by Bloomberg this year. The appeal of diversifying across different currencies, sectors, and countries has gained momentum, with Bell remarking that investors are actively searching for the cheapest opportunities worldwide.
Many consider European equities attractive, as the Stoxx Europe 600 has a price-to-earnings ratio of 18.3, significantly lower than the S&P’s 27.7. Funds focused on Europe have seen steady inflows over the past year, a marked change from the years of outflows, partly spurred by improving economic sentiment in the region. Data recently released indicates that Germany, the economic powerhouse of Europe, saw its first return to growth last year since 2022, bolstered by an increase in factory orders and the significant defense spending announced in March.
Beata Manthey, head of European and global equity strategy at Citibank, pointed out that interest in European stocks is being fueled by “domestic stimulus delivery” and a pivot toward non-tech sectors. Notably, defense stocks have continued their momentum, with companies like Germany’s Rheinmetall and the UK’s BAE Systems posting impressive gains.
While there is renewed enthusiasm for German infrastructure firms, analysts also report increased interest from Asian investors. Tomochika Kitaoka, chief equity strategist at Nomura, observed a growing interest from Japanese investors drawn by Europe’s relatively low valuations.
However, some investors remain cautiously skeptical about the ability of European companies to match the profit growth of their US counterparts. According to Barclays, S&P 500 companies are expected to achieve year-on-year earnings growth of over 12% in the current fourth-quarter results season, while European earnings are forecasted to grow by just under 4%. Hani Redha, a multi-asset portfolio manager at PineBridge Investments, expressed optimism about the impact of German economic stimuli but opted for targeted investments in specific stocks rather than broad indices like the DAX.
This cautious yet growing interest in European equities signals a notable shift in global investment strategies, as investors aim for diversified exposure amidst changing economic landscapes.
