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Categorized | Equities

Imminent QE triggers European fund inflows

Posted on February 27, 2015

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European funds are attracting a rising tide of money as investors prepare for the dawn of full-blown quantitative easing by the central bank to combat deflation and jump start growth.

Stocks have reached new highs and bond yields have fallen to ultra-lows as capital inflows to European equity and credit funds increase.

    Funds that invest in European equities took more than $4bn in the week ending February 25, according to data from EPFR Global, helping to push the FTSE Eurofirst 300 index to a seven-year high this week.

    Even Greece, home to a debt crisis in constant danger of boiling over, had its biggest inflow into domestic equity funds so far this year.

    With the European Central Bank scheduled to begin a programme of sovereign bond buying in March in an attempt to boost the currency bloc’s fortunes, investor focus remains on how rates markets will react, said Justin Knight, strategist at UBS.

    European bond funds recorded capital inflows of €1.09bn during the past week, marking a slight demand slowdown from the pace of the previous three weeks, but sufficiently high to enable Germany to sell more than €3bn of five-year debt with a negative yield for the first time.

    Across the eurozone, yields on government debt have fallen to record lows following the ECB’s announcement that it will begin a €60bn a month programme of bond buying in March. As a growing swath of government bond yields drop below zero, countries including France, Finland and the Netherlands have been able to sell debt to investors at a negative yield, meaning that in effect investors pay to lend the governments money.

    “QE is coming at a very opportune time for these bond markets,” said Mr Knight. If the bond buying plan boosts growth and borrowing costs continue to fall it could mean that countries in the eurozone see their debt to GDP ratios drop, making their debt burdens more sustainable.

    Corporate borrowers have also moved to take advantage. US companies including Priceline, AT&T and Mondelez International opted to raise money in European debt capital markets this week, pushing the number of sales by US borrowers in Europe to a record high of $16.5bn so far in 2015.

    But for fund managers, low or even negative yields in fixed income are more uncomfortable.

    Andrew Milligan, head of global strategy at Standard Life Investments, said there was interest among some investors in buying European equities as an alternative.

    “I think the appearance of negative bond yields is one factor, although we should not forget other aspects of this developing story — the improvement in European economic prospects and of course imminent QE affecting the euro currency,” he said.

    Tommaso Mancuso, head of multi asset at Hermes Investment Management, said clarification around QE had removed a significant point of uncertainty about investing in European equities. The fund manager recently rebalanced portfolios to reduce exposure to US equities and increase it in Europe.

    The caveat, he added, is the question of what might happen in the US. “The Europe story could be reversed if the Fed acts in a way that surprises investors. If it spooks the US equity market then it would be likely to have an impact in Europe too.”