Goldman Sachs strategists indicate that recent capital inflows into European stock markets have increased, marking a reversal of nearly two years of continuous selling since Russia's invasion of Ukraine.
Although capital flows are typically related to economic cycles and expectations, this time the inflows lag behind the improvement in survey data in both timing and scale. Additionally, there has been an increase in inflows to cyclical stocks, Goldman notes.
Strategists wrote that this observation further suggests that the turning point in the European economy is driving capital inflows, a trend that is also evident in the United States.
They added that in recent years, Europe has been the region with the least long-term capital inflows, with almost zero cumulative net inflows since 2020. They believe there is still room for capital inflows to increase.
According to Goldman Sachs data, domestic investors who had been withdrawing from European equities in recent years have now returned, and international investors have also increased their holdings.
The capital flows of American investors have recently improved, showing a strong correlation with rising confidence and expectations. They have been quicker to purchase European stocks than domestic investors.
However, Goldman notes that balanced and multi-asset funds, which were major buyers due to low interest rates from 2011 to 2022, are unlikely to return.
Meanwhile, corporate buyers have become new key players in the region, making purchases through buybacks. Strategists expect this trend to continue, driven by strong profits in the energy and banking sectors.
In recent years, European households have been significant savers, preferring cash, deposits, and bonds over stocks. The Goldman Sachs team believes that when interest rates are lowered, combined with the currently observed moderate cyclical upswing, these households' interest in stocks will increase.
Strategists added that the issue of Europe's lack of investment and growth is gaining more political and policy attention, with increasing discussions on how to more actively utilize European savings to address this.
