Record inflows raising concerns of a 'crowded trade'
The launch of the
Eurozone's quantitative easing program has not been lost on investors who are now pouring money into the European equity markets, as measured by record inflows in March.
TrimTabs Investment Research calculated a record $7.8 billion worth of inflows into European-focused equity exchange-traded funds last month, even though some of the funds have suffered from the
performance drag caused by a surging U.S. dollar.
“The massive buying shows absolutely no sign of slowing,” said David Santschi, Trim Tabs chief executive.
“Europe equity ETFs already issued $950 million on the first two days of April,” he added.
The
March inflows into the category beat the record set in February of $4.4 billion. And, according to Trim Tabs, the European ETF category hasn't posted a daily net outflow since Feb. 3.
“You could almost call it front-running quantitative easing,” said Scott Colyer, chief executive of Advisors Asset Management.
“The Eurozone has pulled out all stops to support those economies and investors have been moving in because they know what QE has done for the U.S., U.K. and Japanese stock markets,” he added. “But it is starting to look like a crowded trade, and I would suggest if you don't own it now you might want to wait a bit for a better entry point.”
Evidence of the kind of confidence investors have in quantitative easing is found in the $930 million in March inflows for the $9.63 billion iShares MSCI EMU (EZU). This is an ETF that took in $730 million during January and February, combined.
The $18.73 billion Vanguard FTSE Europe ETF (VGK) had $550 million worth of March inflows, compared with $740 million during the two previous months.
The $17.3 billion Wisdom Tree Europe Hedged Equity Fund (HEDJ) had March inflows of $4.8 billion, compared with $5.3 billion during the first two months of the year.
“These are abnormal flows, but I think investors will continue to look to the Eurozone for signs of growth from quantitative easing because they've already seen what can happen with quantitative easing in the U.S.,” said Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ.
“U.S. investors have been mostly underexposed to European equities because the U.S. has been a much stronger market,” he added. “It could be a bit of a catch-up for investors, and the trend is your friend, until it's not.”
Nick Kalivas, senior equity product strategist at Invesco PowerShares, said there are a lot of forces working in favor of European stocks, but that doesn't mean the rush in won't lead to some kind of sudden correction.
“Certainly, people are aware of what has happened with U.S. stocks, and they now see the QE in Europe as a replay of that,” he said.
Factoring in the weaker euro, which benefits European exporters, makes the trade even more attractive, Mr. Kalivas explained.
“It generally takes about a year for a change in currency to filter into and completely work through the stock market,” he said. “Since the euro has fallen so sharply, it should benefit investors through 2016.”
And, relative to U.S. equities, he said, European stocks still look cheap.
“What will be interesting is the way it has become such a crowded trade, because the flows are tremendous,” Mr. Kalivas added. “I think the investor has to be very conscious of the risks of a correction in the near term, and that makes me a little uncomfortable.”
