European stock funds suffered their largest redemptions in nearly six months as the region’s strengthening currency damped investor enthusiasm.
Investors pulled $1.4bn from European equity funds in the week ending August 30, according to data provider EPFR. It marks the largest redemptions since March and the first time the fund class has suffered back-to-back outflows since then, when concerns over the outcome of the French election — and the implications for the broader eurozone — increased.
The withdrawals come as the euro has continued to strengthen against the dollar and British pound. The euro has climbed 13.3 per cent this year, reaching a two-year high of $1.21 against the dollar in August.
Consistently strong economic data showing solid growth in the region has helped bolster the currency, alongside expectations that the European Central Bank is likely to begin tapering its quantitative easing programme before the end of the year.
European equity funds have recorded inflows of more than $30bn this year, but the stronger currency is beginning to shift investor sentiment, said Vincent Deluard, global macro strategist at INTL FCStone.
“The opportunity in Europe was earlier this year,” he said, adding that the euro is still low by recent historical standards, having traded as high as $1.40 against the dollar in 2014. “There is a lack of a positive catalyst . . . It seems premature but it is weighing on the market.”
In the US, stock markets remain below record intraday highs reached earlier this summer. Geopolitical concerns, high stock price valuations, doubts about the ability of inflation to rise and an intensifying debt ceiling debate have given some investors reason to suspect a turning point for equities.
“You have all the ingredients for a correction,” said Mr Deluard.
Investors have pulled more than $30bn from US stock funds since the middle of June, redemptions that have primarily hit mutual funds as investors shift into passively managed exchange traded funds. In the week to August 30, US stock funds counted less than $300m of fresh capital commitments, the first inflows in 11 weeks.
Some investors say that with strong US GDP numbers, continued low volatility and a weaker dollar expected to bolster earnings, it is still too soon to call the top for US stocks, however.
“There is no break on this bull. It’s hard to see why it would quit,” said Jim Paulsen, chief investment strategist at Leuthold Group. “People are focused on non-fundamental forces.”
Elsewhere, global high-yield bond funds posted inflows of $272m. Strategists at Goldman Sachs said that despite the stronger euro and concerns about the central bank’s action over quantitative easing, they still prefer European credit over the US.
“The sharp euro appreciation against the dollar is the likely byproduct of an improving macro backdrop in Europe and the persistent murkiness of the US policy outlook,” said the analysts.