European Equity Funds

“During the week ending October 23, investors plowed $5 billion into European equity funds, the biggest weekly inflow ever. These funds have seen nothing but inflows for the past 17 weeks.”

October 16, 2013:

European cyclically adjusted P/E (Shiller P/E) is still 30 % below its long term average. US market is at or slightly above its long term average.

Shiller PE

This is the argument for buying European equities right now (over US ones). And US buyers have started to return. It all comes down to one assumption, that the problems in Europe are actually solved.

Buying European Equities


Best Performing Currency

At end of last week, EUR became best performing currency year to date. In trade-weighted terms, the EUR has rallied by 5.8 % this year, versus 5.5 % for the CNY and less than 2 % for the trade-weighted USD.


“Concerning the performance of the EUR, we have to differentiate between noise and trends. At this stage, it is the flow into the eurozone equity markets and eurozone banks reducing the size of their balance sheets, which are driving EUR, and not the relative growth trend or even interest rate differential. The chart below illustrates the de-coupling of EURUSD from rate differentials, bearing a very clear message.”

“Only when banks have prepared balance sheets well enough for the [Asset Quality Review] does the EUR have the potential to fall back to ‘fair’ levels defined by yield and interest rate differentials. Since the AQR will reference 2013 year-end balance sheets, we think the EUR is likely to peak in early to mid-December.” (Morgan Stanley)


Historically, hot money capital flows has been the best explanation for swings in EUR/USD.

Euro Area Equities vs EURUSD

EURUSD Volatility

China Liquidity Squeeze

“We expect front-end rates to moderate in coming days, especially as seasonal needs for liquidity subside. The People’s Bank of China’s (PBoC) has suspended reverse repo operations in the past two weeks. Since October 23, the interbank rate, as measured by the most liquid 7-day repo, has risen to above 5%. This is significantly higher than the mid-3% level in mid-October and is the highest it has reached since June, although still well below the June level. This rise has triggered concerns in the market about another liquidity squeeze. However, the PBoC conducted a small liquidity injection today (October 29), likely in an attempt to prevent rates from moving even higher.” (Goldman Sachs)

China (1)


Bias Remains to Engage in Markets to Upside

“Our GLI looks to have entered Slowdown phase last month – historically, in this phase of cycle, equities returns are positive but subdued with bias towards “low beta,” less cyclical industries. Weisberger cont’d: Equity performance since the onset of the still nascent Slowdown has been quite vigorous, perhaps influenced by a sharp decline in yields. For example, over the last month the SP 500 is up nearly 5% whereas in a typical Slowdown – which lasts a full seven months – the return is around 3%.

Robust start to Slowdown phase comes after fairly moderate market run during preceding Expansion phase, which lasted from April to September. During that period, equity performance was positive, but not on par with the historical average for the Expansion phase. Just like the tailwind currently is probably rate relief, the headwind then was probably the rate selloff, which also exceeded historical norms for Expansion.

Our bias remains to engage in markets to upside, both in terms of equity risk generally, but also with respect to a positive “growth” impulse, more specifically. Given our forecast for US growth of around 3% in 2014 and beyond, we remain optimistic about equities’ prospects even from current high levels, and are inclined to consider any substantial re-pricing of forward growth views lower a mistake.” (Goldman Sachs)


Biggest Annual Inflow Since 2000

Inflow of $281 bn into all equity mutual funds and ETFs this year is biggest annual inflow since height of technology stock bubble in 2000, when $324 bn flowed into equity funds. Breaking flows down, U.S. equity MFs and ETFs have issued $124 billion this year, the first annual inflow since 2007. Global equity MFs and ETFs have issued $157 billion this year, the fifth consecutive annual inflow.”

Investors have been pumping huge sums into equities in October. Although global equity funds have only about one-third the assets of U.S. equity funds, global equity MFs and ETFs have received $24.5 billion this month, roughly equal to the inflow of $24.6 billion into U.S. equity MFs and ETFs. The global equity fund inflow is the second-highest this year, while the U.S. equity fund inflow is the third-highest this year.”

Combined inflow of $49 bn into all equity funds this month is fourth-highest on record – note that three of four largest inflows have all happened this year.”

And the Great Rotation:

Bond mutual funds and ETFs have lost $24 bn this year, first annual outflow since outflow of $7 bn in 2004 and the biggest annual outflow since an outflow of $50 billion in 2000.” (TrimTabs)


Trimtabs (1)