Goldman Sachs says money flowing into European equities is small and just a fraction of what left the region between 2016 and 2020 as domestic investors are still shying away from going big on the old continent.
The recent sustained investment into European equities has come from foreign investors, Goldman said in a report on Monday, driven by demand for cyclical stocks, whose fortunes are closely tied to economic conditions.
European equities have seen fund inflows for 11 consecutive weeks and that has helped the pan-European STOXX 600 .STOXX slightly outperform its U.S. peer S&P 500 .SPX in 2021 for the first time in six years.
The STOXX 600 has been hovering near record highs.
Foreign investors hold 43% of European equities, up from 10% in the early 2000s, with U.S. investors owning 28%, Goldman data showed. Domestic pension and insurance companies own just 3% of European stocks.
European pension funds have been encouraged by regulators and conservative sponsor companies to allocate more to safe-haven bonds, the U.S. investment bank said. It added that the trend worsened after Solvency II regulations set a high capital cost for allocating to listed equities.
What’s more, surging household savings during the lockdown in Europe are largely kept in deposits rather than being allocated more to risky assets, unlike in the United States where retail investors “have been a large force” behind the rally for the past year.
“The ability of European equity to attract capital will depend on a number of factors, most crucial of which will be the ability to grow earnings, provide investors with innovative growth stories and encourage domestic investors to shift more into stocks,” Goldman strategists wrote in a note titled “Europe in vogue”.
Though Europe is heavy in banks and other cyclical stocks that profit when the economy recovers, investors see a lack of growth stocks as a factor in its underperformance in recent years.
“For most of the period since 2016, there have been outflows from European stocks – a combination of disappointing domestic economic growth, European risks (Brexit, sovereign debt issues) and high exposure to low-growth sectors acted as a disincentive to invest in European stocks,” the U.S. bank said.
Source: Reuters (Reporting by Thyagaraju Adinarayan; editing by Jason Neely)