ANALYST: Investors Are About To Stage A Massive Rotation Into European Stocks

Euro signREUTERS/Ralph OrlowskiThe euro currency sign sculpture with a damaged star stands in front of the headquarters of the European Central Bank (ECB) prior to the monthly ECB news conference in Frankfurt, August 1, 2013.

In a recent note, Oppenheimer chief market strategist John Stoltzfus passed along an interesting anecdote: “Stateside investors are beginning to consider investments in Europe and elsewhere ex-U.S. for diversification once again as multiples expand stateside and hints that conditions are beginning to improve outside of the U.S., particularly in the developed European markets, emanate.”
And as the latest flash PMI data out of the euro area this morning seem to confirm that the economy is turning a corner, the European comeback story is picking up speed.

Last week, flows into European equity funds were the biggest in more than two years — at $US2.3 billion — while investors pulled money out of U.S. equity funds for the first time in seven weeks.

The Société Générale global asset allocation team, led by strategist Alain Bokobza, is optimistic that this is the beginning of something much bigger.

In a note to clients titled “European equities should enjoy net inflows of $US100bn soon,” the team writes:

Europe still missing $US100bn of net inflows: No wonder equity market performance in Europe has been lagging that of the US since 2007. Looking at cumulative net inflows into European equity markets since then, it would take $US100bn of net inflows to close the gap that has developed. The contrast with cumulative net inflows into other equity markets is startling: the US, Japan and especially Emerging Markets are all in positive territory already.

Fed exit to change balance between US and European assets: We firmly believe that Fed tapering will favour European assets relative to US assets. Although the flows have been particularly thin this summer, the latest data confirm that net inflows are picking up for European equities, whereas they are slowing for US equities.

New weekly fund flows data are out this afternoon, so we will get a chance to see if this was just a one-off or a continued trend.

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