* U.S. bet on European recovery goes awry
* Hefty outflows from U.S. funds invested in European shares
* Dollars flow into cheaper emerging markets
* ECB stimulus seen needed to reverse trend
By Francesco Canepa
LONDON, Aug 15 U.S. investors are withdrawing
billions of dollars from European stocks as signs of a stalled
economic recovery, compounded by the Ukraine crisis, halt the
past year's scramble to buy back into the region.
The switch out of Europe into emerging markets or the United
States is not yet a wholesale exit, with several large asset
managers trimming rather than axing their exposures to the
region - a far cry from the panic of 2011 at the height of the
euro zone debt crisis.
But the rapid pace of outflows from easy-to-trade vehicles
such as exchange-traded funds, often seen in the past as an
indicator of future investor sentiment, may derail Europe's
two-year equity rally, with investors growing impatient for the
European Central Bank to act more radically to spur growth.
Lipper data for 106 U.S.-domiciled funds invested in
European equities shows their longest streak of consecutive
weekly outflows since 2011 in the nine weeks to Aug. 14.
Over that period, investors withdrew $3.25 billion from the
funds' nearly $50 billion assets, mostly held in ETFs.
"People had been expecting a quicker recovery in Europe and
now are realising it's not happening," said Dan Morris, global
investment strategist at New York-based TIAA-CREF Asset
Management, which manages assets worth $613 billion.
"Then you add on top of that what's going on in Russia and
Ukraine and people are saying: 'There have got to be better
opportunities in other parts of the world'."
As investors pulled out of European equities, the Lipper
data showed U.S. funds invested in emerging markets recorded
inflows of $5.7 billion over the same period, taking their total
assets to $289 billion.
Morris said he now prefers shares in emerging markets to
European stocks in light of the euro zone's enervated economy
and valuations which no longer look appealing.
The Europe-focused funds had attracted inflows over a year
when U.S. investors were betting on economic revival in the euro
zone, where stock valuations were cheaper and the market was
underpinned by the ECB's pledge to save the euro.
Now the focus is shifting to high unemployment, sluggish
reforms and tit-for-tat sanctions imposed by the West and
Russia, the EU's second-largest source of imports and
fourth-largest export market.
"U.S. bought Europe big last year because of ECB, reform and
value," said Michael Hartnett, chief investment strategist at
Bank of America Merrill Lynch in New York. "All three are less
GERMANY HIT HARDEST
Germany, home to Russian-exposed companies ranging from
Adidas, the world's second-largest sportswear firm,
to airport operator Fraport and defence firm
Rheinmetall, was hit hardest by U.S. investors.
The U.S.-listed iShares MSCI Germany ETF, which tracks
large- and mid-sized companies, saw outflows of $1.4 billion in
the first seven months of the year, equal to 30 percent of its
current total assets.
The German fund's return over the period is a negative 5.21
percent, underperforming 97 percent of all European-focused ETFs
listed in United States, according to Lipper data.
"Expectations were for a modest recovery but it has been
particularly shallow and it has been compounded by not only a
strong currency but also tensions between Russia and
Ukraine, as well as, more recently, the sanctions," said Charles
Shriver, portfolio manager at Baltimore-based T. Rowe Price,
which manages assets worth $738 billion.
Shriver has reduced his equity allocation to Europe in
favour of emerging markets over the past six months.
Relative valuations, a key factor in luring U.S. buyers over
the past year, have ceased to be attractive, too.
European shares trade at 13.8 times their expected earnings
for the next 12 months, Datastream data showed. This is close to
the lowest discount to their U.S. counterparts in 10 years at
15.6 times, and the largest premium to emerging markets at 10.7
The stimulus of U.S. takeover bids for European companies,
when U.S. pharma group AbbVie snapped up British rival
Shire and AstraZeneca turned down Pfizer
, has also worn off, with suitors discouraged by
valuations and doubts about tax breaks.
"You want to see the European market down to around 12 or so
on a forward-earnings basis," said David L. Donabedian, chief
investment officer of private wealth management firm Atlantic
Trust in Baltimore, which has assets of $25.4 billion.
But without an obvious catalyst from the European Central
Bank, whose mandate limits its scope for Federal Reserve-style
quantitative easing, the outflows may continue.
"We're not going to wait around for a continual decline in
the economy," said Jack Ablin, chief investment officer of BMO
Private Bank in Chicago, which manages assets worth $66bln. "If
there is a better opportunity somewhere else, we're going to
move that capital."
(Additional reporting by Timothy McLaughlin in Boston; Editing
by Lionel Laurent/Ruth Pitchford)