Investors are rapidly increasing their investments in European equities, driven by expectations of a significant surge in infrastructure and defense spending. This influx of capital marks the highest rate of investment in the region in nearly a decade.
According to Bank of America Corp., citing EPFR data, regional funds experienced inflows of approximately $12 billion in the four weeks leading up to March 5th. This represents the most substantial investment since August 2015. This renewed interest in European equities stems from commitments by European leaders, including Germany’s Chancellor-in-waiting Friedrich Merz, to allocate hundreds of billions of euros towards military and infrastructure projects. This spending surge is anticipated to fill the void left by the decreasing US support for Ukraine. Bank of America strategists, including Michael Hartnett, noted that weekly flows into European equities have returned to pre-2022 invasion levels.
European Stock Market Index
Hartnett emphasized the potential impact of Germany’s planned spending increase, suggesting that the “whatever it takes” approach to European rearmament signals a period of fiscal expansion in the euro region. This contrasts with potential fiscal austerity in the US, hinted at by proposed cuts to federal spending. This divergence in fiscal policy could lead to German bund yields surpassing US Treasury yields by the end of the year, according to Hartnett.
European stocks have shown a strong performance this year, significantly outperforming their US counterparts. The pan-European Stoxx 600 Index has risen by 8.5% year-to-date, marking its best start to a year since 2015. In contrast, the S&P 500 has declined by 2.4%, and the Nasdaq 100 is nearing a technical correction.
Comparison of European and US Stock Market Performance
This notable outperformance has led another team of Bank of America strategists to revise their stance on European equities, downgrading them from overweight to marketweight relative to global peers. The shift in recommendation underscores the rapid changes in market sentiment and the need for investors to carefully consider their investment strategies in light of evolving economic and geopolitical landscapes. The substantial inflows into European equities indicate a growing confidence in the region’s long-term economic prospects, driven by anticipated government spending and a potential shift in global fiscal dynamics.
