Investors Are Ditching U.S. Stocks in Favor of European Peers

(Bloomberg) -- Global equity investors who had shunned Europe for months are back, and at the expense of the U.S.

Since October, global funds have made a “significant rotation” out of U.S. stocks into Europe excluding the U.K. and into Japanese equities, equity strategists at HSBC Holdings Plc wrote in a note. The shift comes as banks including Goldman Sachs Group Inc. and JPMorgan Asset Management predict that European stock returns could exceed those of U.S. peers in 2017.

Investors are embracing the region's equities after avoiding them for most of 2016 amid worries about a sluggish economy, the Brexit vote and Italy's banking crisis. This year, bulls are betting on stronger global growth, rising profits and a weaker euro to push European shares higher, despite political risks including an upcoming French election.

“This rising optimism towards Europe suggests that investors are relatively relaxed regarding the political uncertainty facing Europe over the next twelve months,” HSBC strategists including Amit Shrivastava wrote in their note Wednesday.

While U.S. equities are trading near record levels, European benchmarks remain well below their peaks. That's driven valuations between the S&P 500 Index and the Stoxx Europe 600 Index further apart.

Investors have increased their holdings in European equities by more than double that in Japan since October, while reducing them in the U.S., according to HSBC. The rotation indicates investors are playing the current business cycle by buying shares of industrial firms, which have a higher weighting in European and Japanese stock indexes than in their U.S. counterparts, the bank says.

Within Europe, funds have turned overweight on lenders for the first time since late 2015, according to HSBC. Banks have been the biggest gainers in Europe after miners in the past six months, helped by rising bond yields amid prospects for tighter U.S. monetary policy.

Among regional markets, non-euro countries including Switzerland and Sweden were key contributors to inflows since October, but those in the single currency zone have started to catch up in the past month, the strategists wrote.

To contact the reporter on this story: Aleksandra Gjorgievska in London at agjorgievska@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Namitha Jagadeesh, John Viljoen