Europe’s Economy Still Can’t Attract Investors

Spare a thought for the globe-trotting European stock salesman. Europe’s equities have seen 25 straight weeks of fund outflows, according to Bank of America-Merrill Lynch, wiping out all of 2017’s inflows. It’s the only region recording meaningful outflows this year—even emerging markets, performing far worse, can’t make that claim.

So why can’t Europe get any love? The push factors are obvious: From Brexit to the Italian budget, Europe is still a continent that has a reputation for in-fighting for global investors. At the same time, the pull factors are lacking: Economic and earnings growth is decent but unimpressive and subject to the vagaries of US President Donald Trump’s trade policy. And there are no technology giants even buzz-worthy enough for an acronym, Bloomberg reported.

“We’ve had a lot of bumps in the road in Europe,” said Edmund Shing, global head of equity and derivative strategy at BNP Paribas SA in London. Investors “just get a bit tired of it”. Europe is not relevant or particularly interesting. But it’s not always fair. “People sometimes paint too broad a brush-stroke in terms of Europe,” he added. “There are some very strong stories.”

Foreign cash matters, because global investors are often the marginal buyers of European stocks, since domestic investors put less money into equities than their American peers, Shing said. Global funds account for 24% of European stocks, whereas in the US, they own 15%, according to a Barclays report.

  Not Particularly Interesting

Investment performance, especially after conversion to the strengthening dollar, justifies the lack of enthusiasm, at least to an extent: “Europe is not relevant or particularly interesting,” said Peter Garnry, head of equity strategy at Saxo Bank A/S in Hellerup, Denmark. With a weak financial sector and a nearly non-existent technology industry, Europe’s equity brand is “damaged”, he added. Queries he receives from clients outside the region are mostly about US technology and Chinese stocks—not Europe.

Another thing that doesn’t help is the chronic under-performance of value strategies. European shares tend to be seen as value investments in the US, BNP’s Shing said, and global value stocks are close to the lowest they’ve been versus growth stocks since 2000.

Then there’s trade. Even after a brief detente reached with the EU in late July, Trump said Thursday the bloc’s trade practices are “almost as bad as China”. He had earlier threatened to raise tariffs on European car imports.

  Hopes Linger

But not all hope is lost. Remember last year? Money flooded into European equities when it was clear that the centrist Emmanuel Macron would win the French election. There may not be a similar knight in shining armor this year, but for inflows to revive, Italy has to first avoid a collision course with the EU over its budget. Then there are the Brexit talks where, even in the critical final phase, the outcome remains uncertain.

To global investors, Brexit is not just a matter of currency volatility, but also a systemic issue with contagion risks across Europe, said Emmanuel Cau, head of European equity strategy at Barclays in London.

“If you get fairly smooth budget negotiations in the next few weeks in Italy, that might help flows to find a floor,” he said. “The biggest one is still Brexit, and I do think a lot of investors would be on the sidelines until they have clarity.”

  Italy in Crisis

Fitch Ratings slashed its rating from “stable” to “negative” after Italy’s new populist leader Matteo Salvini vowed to cut tax. Italy remains defiant with the Lega-Five Star Movement coalition saying it could even breach the EU’s budget limits to carry out its election promises.

Branding the coalition a government of “new and untested nature”, Fitch said Italy could easily plunge into economic crisis due to a shock, be that a short-run fluctuation or a significant change of economic growth.

The agency said: “Fitch expects a degree of fiscal loosening that would leave Italy’s very high level of public debt more exposed to potential shocks.”

Italy’s €2.3 trillion ($2.67 trillion) debt is the world’s third-largest and equivalent to more than 130% of its domestic output.

Fitch retained its “BBB” credit rating, the fourth-best rating assignable.