Coming down from euphoria

Europe’s blossoming love affair with equities is cautiously confirmed by Salomon Smith Barney’s latest European Fund Flows strategy report. According to this latest data, an average of $5.1bn (E4.9bn) is being pumped into European domiciled equity funds every month.
But the important question is not whether inflows into equity funds are large, but rather, whether these inflows are growing. SSB’s data suggests that they are not, at least in recent months. Indeed, inflows have slowed down in all of the main European markets over the second quarter of 1999, and across Europe as a whole have fallen by almost 20%.
A trend towards equity investment, and particularly non-domestic equity investment, is an indicator of growing maturity amongst Europe’s investors – whether retail or institutional. Total net asset growth and the changes in the asset mix within each fund market present part of the picture but for a ‘cleaner’ picture of trends, market or fund performance needs to be stripped out. Salomon Smith Barney take data from all available sources, whether regulatory, private or from trade associations, to compile this monthly report on investment trends.
The largest share of the new money has been from Germany ($ 7.7bn), followed by Italy ($ 5.5bn) and finally the UK ($ 4.8bn). Although the UK still has the largest amount of equity fund assets, it is no longer the case that the UK accounts for the bulk of Europe’s equity inflows.
In one of Europe’s most important markets, Germany, flows into German equity funds slowed down in April and May, with foreign investors selling in 1999, following increased demand in 1998. Nevertheless, equity fund assets now account for as much as 38% of the German total. (This may seem an unusually high proportion, considering the traditionally risk-averse profile of the German investor, yet the figure is confirmed by data from Lipper Limited, Reuters’ fund information division.) Foreign demand for German bonds, meanwhile, remained strong.
In neighbouring France, meanwhile, the picture is less rosy; inflows into equity funds have decreased throughout the second quarter. Over the year to date, French investors have tended to favour foreign equities over their domestic equivalents, but in June favoured neither, and were net sellers of both foreign and domestic equity funds. Despite this, the healthy inflows of the first quarter have not been wiped out, and equity fund assets now account for more than 29% of the industry total – up by 2.5% on the December 1998 figure. The staple of the French industry, the money market sector, continued to suffer outflows in the end of the second quarter, although demand for French bonds increased over the first half of this year.
Moving south to Italy, the story is similar – there too, inflows have slowed – down to about 22% of the total for 1998 over the first six months of 1999 - although not quite so dramatically as in France. The phenomenal head of steam built up over 1998 (largely due to the banks actively moving their clients from deposit accounts and into funds) may take some time to cool off, and demand for foreign equities remains fairly strong, with monthly inflows still running at more than LIt3.5trn (E1.8bn). Domestic equity funds have, however, been sustaining outflows all through the first half of 1999, resulting in a negative liquidity indicator for Italy. That is, outflows from domestic equity funds have been such that they are expected to have a negative impact on the equity market. The strongest demand is now for non-Eurozone equities.
Looking closer to home, flows into UK equity funds remain healthy, relative to 1998 values. However, as in much of the rest of the continent, inflows have slowed since the record figure which is over £1.3bn, (E2bn) posted in March 1999, and while UK investors continue to buy both domestic and, to a modest extent, foreign equities, foreign investors were net sellers of UK equities in the first quarter of 1999. This was offset though, by robust demand for UK bonds – a reversal of fortunes for fixed income products, following several quarters of net selling by foreign investors.
The overall picture then, seems to be of a European market which is coming down from the euphoria induced by the wave of bullishness which gripped investors for most of last year. Equally this appears to be heralding an incipient return to fixed income products, despite the fact that bond markets have been in retreat since January.
However, hard data on fund flows is difficult to find and even more difficult to interpret. The difficulty in interpreting the data comes from the fact that the universe of funds measured by each local trade association or regulatory body varies. Salomon Smith Barney attempt to circumvent this problem by drawing on multiple sources, yet the fact remains that monthly, or even quarterly, movements tend to be sharp and do not always reflect longer term trends. A truer picture comes from looking at data drawn over much longer periods of time.

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