European assets: overbought or oversold?

Will 2022 be the year when the tide goes out in Europe’s financial markets? Many commentators now say it will, and point to the large sums of cash that have gone into stocks, bonds and other financial assets in the past.

In 2021, mutual funds and ETFs in Europe are estimated to have attracted €724.1 billion euros, according to data from Refinitiv. Of these, €5.2 billion went into money market funds, and the rest was invested into long-term instruments such as funds.

Most of the money invested in Europe last year went into mutual funds (+€563.2 billion), with ETFs getting €160.9 billion.

This suggests that investors still trusted the skills of asset managers, rather than relying on the central banks to keep pumping money in the economy and lift the prices of all assets. Indeed, active funds got almost 70% of the money, while passive funds received 30%.

The risk-on mood of last year was further confirmed by the fact that stocks saw the bulk of the money going in. Equity funds had the highest estimated net inflows overall for 2021, as they received €331.7 billion.

Bond funds attracted €195.9 billion, while mixed-assets funds saw €174.2 billion going in; they were followed by alternative UCITS funds (+€11.4 billion), commodities funds (+€6.7 billion), real estate funds (+€5.5 billion), and money market funds (+€5.2 billion).

All this cash came at a time when the economies in Europe were still not functioning properly, with sectors shutting down temporarily because of the ongoing Covid-19 pandemic, and supply chains disrupted.

But at the same time as hopes grow that 2022 will be the year of return to some sort of post-pandemic normal, investors in financial markets seem to have lost their enthusiasm.

Big losses in Europe

The main stock market indices have started the year strongly in the red. With one day to go to the end of January, the STOXX 600 index is down 5%. This index, containing 600 issuers in 17 European countries, covers around 90% of the market capitalisation in Europe.

Stoxx Europe January Performance
Source: Google Finance

Germany’s DAX index is down more than 4% year to date, France’s CAC-40 lost 3.5%, Spain’s IBEX is down 1.7%. The UK’s FTSE 100, a laggard since the Brexit vote, has done comparatively well: it is down just 0.5% year to date.

This partial unwinding of last year’s flows is on a certain level understandable. The year 2022 did not start with the best news: central banks are making noises about withdrawing monetary stimulus to cope with sharply higher inflation, and Russia threatens to cut energy supplies if its demands are not met.

On top of this, labour markets are seeing shortages that are pushing up wages, putting even more upwards pressure on consumer prices.

But over the longer term, perhaps all this could be good news. If accompanied by strong economic growth, inflation could in fact contribute to eroding the mountain of debt that Europe sits on, removing one big worry that investors have about the region.

Putin’s sabre-rattling and his use of Russia’s huge reserves of oil and gas to hold European countries to ransom could accelerate the shift towards renewable energies and lessen the region’s dependence on his whims for imports of energy.

Investors may worry about the present-day tensions in Europe, but for the longer term, the current economic situation could present an opportunity. One investor’s unloved asset could become another’s bargain.