Post-Brexit, European equities witnessed outflows of about 2.1% of total assets under management, and in the absence of any short-term positive indicators, analysts at HSBC don’t expect this trend to reverse anytime soon. Amit Shrivatsava and colleagues point out in their August 31 research piece titled “Fund holdings: Investors flee Europe as funds remain cautious” that international funds are cautious on Europe.

European equities witnessing 26th week of outflows

Shrivatsava and team point out that post-Brexit, European equities witnessed cumulative outflows of $34.7 billion, translating into about 2.1% of total AUM. Tracking fund flows, the analysts highlight that with the latest streak of outflows running into their 26th week, this marks the joint longest streak of redemptions from European equities. Of note, the latest outflows are on par with the outflows in the 2008 financial crisis. Incidentally, emerging markets turned out to be the biggest beneficiaries with net inflows of 1.2% of total AUM:

Investors flee European Equities

The HSBC analysts highlight that amid heightened uncertainty in Europe, funds have turned more cautious on Europe, and global funds’ allocations in Europe dropped below the five-year average. The analysts point out that their positioning data reveals strong indications of home bias, with funds tending to be overweight the country in which they are domiciled.

Recently analysts at Kepler Cheuvreux underscored that the reversal of acute international underperformance of European equities can be reversed if the domestic cyclical universe displays more resilience.

Utilities witness enhanced holdings in all developed regions

Highlighting the drop in holdings for high beta sectors, Shrivatsava and team point out that the average fund holding of high beta sectors relative to low beta sectors has dropped sharply across major regions in recent months.

However, utilities, which is traditionally considered a low beta defensive sector, turned out to be the key beneficiary of the reallocation. The HSBC analysts highlight that utilities witnessed growing interest from international funds. They note that mutual funds in all key regions except emerging markets have enhanced their weightings in utilities. However, the analysts point out that global funds remain considerably underweight utilities.

Drop in high beta holdings

Tracking one month’s holding data after the Brexit referendum, the HSBC analysts point out that consumer staples continue to garner interest, marking an increase of 50bps in its weighting. Shrivatsava and team note that materials also turned out to be the best-performing sector in Europe, posting a relative return of more than 10% in the last three months. However, discretionary and financials have shown further selling, posting a drop in their holdings by 47 and 36 bps, respectively, in the last month.

Materials-best performing sector

Barclays’ Equity Strategy team highlighted that post-Brexit, European value stocks have continued to underperform both growth and the wider market. The firm’s analysts argued that over the past decade and a half, the performance of value has been driven by the 10-year U.S. Treasury yield, coupled with inflationary expectations.