Amid Euphoria In US, European Equity Managers Still Very Cautious

While US investors seem to be bullish on the outlook for equities, it seems European equity managers are more cautious on the outlook for stocks in the year ahead.

Earlier this week, Bank of America issued its weekly client flow trends report, which showed that private clients purchased a net $1.3 billion of stocks last week with ETF net buys surging to the highest level since January and hitting the third highest level in BoA’s data set. This buying means that private clients have acquired a net $7.9 billion of equities including ETFs year-to-date, the highest level of buying since 2008.

However, European equity investors seem to be more skeptical about the current market rally. According to BoA’s latest European Fund Manager Survey, most respondents expect markets to peak in H1 with a Fed/ECB policy mistake the most cited tail risk followed by bond market crash and Chinese debt crisis.

European equity managers are selling

According to the survey, after three to six months, in which risk appetite metrics generally increased, the December survey shows a moderation in such indicators with cash allocations increasing and modest declines in equity weightings as well as exposure to risk.

In fact, European equity managers are so cautious that cash balances rose for the first time in four months and moved back above 10-year averages. That being said, while the average European cash allocation moved back up to 4%, this is still below the global average cash allocation of 4.7%.

“In terms of asset allocation, December saw a mild decrease in equities (net 48% overweight from 49%). Bonds also slightly diminished (-56% to -59%). Equities remain the asset class that is overweight by most investors even though they are considered expensive (a net 45% saying equities are overvalued). However, the balance overweight equities is not at historical extremes (current month is 78th percentile of the range since 2001).”