European Flow of Funds          Pouring into Europe

In March, ZettaCap published a report forecasting impending outperformance for European assets mostly due to the expected underperformance of populists in 2017 European elections, based on Social Media Influence (‘SMI’) forecasts.  Since the report’s publication, there has been a marked uptick in flow of funds to and a seemingly brightening outlook for European assets.

The full report can be found here.  A snippet from the report states:

Social Media Influence (‘SMI’) ratings measure influence of political candidates, topics, companies, stocks, and products. It was the only forecasting method to forecast Trump would win the 2016 US Presidential Election with the correct number of electoral votes and the first known to forecast that Macron would win the 2017 French Presidential Election.

For Europe’s 2017 elections, SMI is forecasting relative weakness for the populist parties. In the Netherlands, Germany and France, we expect populist parties to perform worse than current polls project. Underperforming current poll levels will deflate much of the presumed ‘populist wave taking over Europe’ theme that has overshadowed Euro-based markets.

European financial assets have severely underperformed US comparables over the last decade. It is our contention that political and civil turmoil have kept a lid on European appreciation especially during the last few years. Populist parties underperforming polls and not gaining significant influence in any of the aforementioned main European countries with planned elections in 2017 should remove a considerable amount of risk from European financial assets.

The period between the main European elections of March to September offers an interesting opportunity to revisit European assets. The Euro/USD exchange rate and the French CAC stock index should be two of the main beneficiaries.

Since the publication of the report, flow of funds to and outperformance by European funds have been major news items in a variety of media and trade reports.

• Wealth Management “FUND FLOWS: Investors Pouring Money Into European Equity Funds”
• Bloomberg “European equity funds poised for $100 billion inflow bonanza”
• Investment Week “How Macron’s win is changing the landscape for European equity”
• Reuters “Stock flows into Europe hit highest since Dec 2015 –BAML”
• Barron’s “ETF Flyer: European Stock Funds Jump”
• Morningstar “Can the Great Rotation Abroad Persist?”

So far, the call to take a look at European assets has paid off well.  Flow of funds has surged, outlook has improved, and relative long-term underperformance could be coming to an end.

The next major trigger, which is also highlighted in the report, is the German General Election which is scheduled to take place in September 2017.  Based on SMI ratings, the populist AfD (Alternative for Germany) is still seen as underperforming polls.  Assuming AfD underperforms in Germany, as was the case for populists in the Netherlands and France, the overall environment for European assets will further improve.