Europe Mounts Comeback

Terry Flanagan

After being left for dead, Europe is staging a comeback.

Europe Equity Funds remain on track for a new full year inflow record as they took in another $1.93 billion, their 21st consecutive weekly inflow, as some investors began to pencil in more easing by the European Central Bank to combat deflation, according to EPFR Global.

Assets in the SPDR EURO STOXX 50 ETF have gone from $150 million in late 2011 to $4.5 billion today.

Two years ago there was a financial crisis in Europe, but the trend in the market is toward investment in European assets,” said Rod Jones, North American head of business at Stoxx Ltd.

The EURO STOXX 50 Index is designed to represent the performance of some of the largest companies across components of the 20 EURO STOXX Supersector Indexes. The Index captures approximately 60% of the free-float market capitalization of the EURO STOXX Total Market Index, which in turn covers approximately 95% of the free float market capitalization of the represented countries.

The STOXX Europe Small 200 Index, designed to provide a representation of small capitalization companies in Europe, hit a three year high in 2013.

“U.S. investors today are starting to look beyond traditional large cap Europe exposure they get in indexes to understand the small cap market in Europe,” Jones said. “So we are seeing increased interest in our Stoxx Europe small cap index.”

A roundtable on Nov. 19 hosted by The Federation of European Securities Exchanges and European Issuers covered the financing needs of enterprises, the benefits of public equity markets for companies and for the economy, and the structural problems leading to a decline in IPOs in Europe and around the world.
There was a consensus that Europe must address these challenges to ensure a sustainable economic recovery with job creation.

“IPOs help create jobs, foster an entrepreneurial spirit, drive growth through innovation, and broaden the investment opportunities for savers,” said Christian Katz, CEO of Swiss Exchange. “Our exchanges are all individually doing everything they can to help companies come to the market. We want Europe to prioritize IPOs and access of enterprises to capital markets.”

Although diversified regional funds again took in the bulk of the new money most of the country fund groups attracted some interest, according to EPFR Global. France Equity Funds were one exception, with outflows climbing to a seven week high in the wake of another ratings downgrade and data showing the Eurozone’s second largest economy could be back in recession by the end of the year.

Coupled with the interest in Europe is a trend by institutional asset managers to fold Europe and other regions into their U.S.-based portfolios. “There’s a movement away from having a U.S. and rest of the world policy benchmark,” said Jones. “There’s a movement toward having one benchmark for everything, and whatever exposures you layer in are going to be designed to be that one benchmark, which means that assets will be used more tactically.”

Large plan sponsors are going to a more passive “smart beta” approach. “The large investors will manage more tactically,” Jones said. “An example is Europe small cap. If I have an all country growth type of benchmark, and if I think Europe will outperform Europe small cap, I can buy those assets, and it will be a matter of me outperforming this large benchmark as opposed to me outperforming a more regional benchmark. That definitely is going to happen in the future.”

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