US investors’ sharp switch out of Europe gathers pace – Goldman Sachs

From report dated Nov 20, 2014:

« The latest US Treasury TIC data shows record outflows from European equities in September at USD27.4bn. The recent data have been volatile but generally very weak, with 3-month average net outflows of USD13bn per month. That pace of outflow by US investors is larger in absolute terms than that seen in the financial crisis period in late 2008 and into 2009. »

While some investors expected this would calm down, apparently that’s not really the case… 

Main drivers of flows from US investors to Europe are: « risks » (not defined) and « news on economic growth ».

Says Goldman (bold statements from the bank):

« It’s true that the risk premium rose and economic growth in Europe deteriorated in September – but the deterioration would have been consistent with around zero or slightly negative flows rather than the substantial outflows we have seen. Of course US investors had arguably over-invested in Europe in 1H, so the large swing out may have partly been a retraction of the sizable inflows earlier in the year. »

But according ot GS’s strategists, there are only binary outcomes: either stagflation is the main theme and the current level of risk premium on equities makes Europe a benign case for US investors; or deflation comes in full play and then another market correction might be at stake.

As the following illustration show, there seem to be some correlation between US flows and inflation expectations…

Source: Goldman Sachs

Source: Goldman Sachs

But to make things worse, European investors are also shuning European equities!

« Just as worrisome as the US flows is the reluctance of home-based investors to invest into equities. The chart below shows equity flows by European investors, as per the US flows they softened in recent months (the latest data is September) having been stronger earlier in the year. We find flows into equities by European investors are related to consumer confidence. Confidence has weakened markedly since the summer to not far off the levels seen in mid 2012.Indeed the drop in consumer confidence is consistent with more selling to come by European investors. »

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