Goldman Sachs strategists said that there has been a recent uptick in flows into European equities, marking a long-awaited trend reversal after nearly two years of constant selling since Russia's invasion of Ukraine.
Although flows are typically correlated with the cycle and expectations, this time the inflows have lagged in both timing and size compared to the improvement in survey data, and flows into cyclicals have also picked up, Goldman notes.
“Again, this observation fits with an economic inflection in Europe being the driver behind the inflows, and also with the broadening out in the rally, a trend we see in the US too,” strategists wrote.
“Europe has been the least-favoured region in recent years for long-only flows, with cumulative net inflows being close to zero since 2020. We think there is room for flows to pick up,” they added.
According to Goldman, domestic investors, who had been withdrawing from European equities in recent years, have now returned, with international investors also increasing their exposure.
US investor flows have improved recently, showing a strong correlation with rising confidence and expectations, and they have been quicker to buy European equities than domestic investors.
However, balanced and multi-asset funds, major buyers between 2011 and 2022 due to low interest rates, are unlikely to return, the Wall Street firm noted.
Meanwhile, corporate buyers have emerged as a new key player in the region, making purchases through buybacks. Strategists expect this trend to continue amid strong profitability in the energy and banking sectors.
European households have been significant savers in recent years, favoring cash, deposits, and bonds over equities. Goldman’s team believes that when rate cuts materialize, coupled with the modest cyclical pickup currently observed, there will be “further interest in equities” among these households.
“There is also increasing political/policy focus on the lack of investment/growth in Europe and hence an increased discussion on using Europe’s savings more actively to encourage this, in our view,” strategists added.