August 30, 2013 4:16 pm

Eurozone shares outperform as inflows reach record

Optimism that the eurozone is turning the corner has seen regional equity markets outperform the US, UK and Japan during a volatile trading environment for August.

While the broad European market was rattled this week by expectations that a military strike on Syria looms, sentiment has generally remained resilient, buoyed by a record-breaking $12bn of inflows into eurozone shares over the past nine weeks as investors have sold bonds and emerging market assets.

Analysts expect eurozone shares will continue closing the gap with US equities.

“The macroeconomic momentum is getting better in Europe relative to the US,” said Nick Nelson, global equity strategist at UBS. “If you look at industrial surveys, or purchasing managers’ indices, they have improved in Europe from a lower base – but the surprise has been greater.”

Another key element is the role of central banks, with many investors awaiting next month’s meeting of the US Federal Reserve and a possible decision about reducing its $85bn-a-month bond purchases.

“The US is looking to start to exit from ultra loose monetary policies whereas the ECB is maintaining loose policy for longer,” said Mr Nelson. “The fiscal austerity for which Europe is famous is starting to ease off. Next year we do not expect any major net fiscal drag, so the focus may be more on US fiscal policies.”

The divergence in eurozone equity market returns has been most pronounced in regions that were hit hard earlier this year. Shares in Italy and Portugal have risen around 1.2 per cent, while Greece has gained 1.7 per cent this month.

After starting the final week of August in positive territory, the broad benchmark, the FTSE Eurofirst 300 index, closed out the month with a loss of 1.1 per cent, weighed down in part by Germany lagging other key markets.

Other major global share markets have fared far worse, with the S&P 500 down some 3 per cent in August, its worst monthly loss since May 2012. The UK FTSE 100 index dropped 3.1 per cent while Japan’s Nikkei 225 index recorded a loss of 2 per cent.

After such a bruising month for Wall Street, investors expect further uncertainty ahead of a possible Fed taper in mid-September. The August employment report, to be released next week, is seen as a key gauge of whether the central bank will start the taper and will drive equities.

“A down market on stronger than expected indicators or an up market on weaker than expected indicators suggests that a taper at the meeting will put serious pressure on stocks,” said analysts at Bespoke Investment Group. “An up market on stronger than expected indicators or a down market on weaker than expected indicators suggests that the market is ready to deal with a taper.”

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