European Equities May Benefit As $1 Trillion In U.S. Buybacks Vanish Into Thin Air
European equities may start to finally see some love, as they are now positioned to take advantage of one significant coming tailwind from the U.S., according to Bloomberg. Over the next 12 months, US stocks are going to lose a significant amount of support that they have received from buybacks, as the nearly $1 trillion buyback bonanza that has fueled stock purchases in the United States starts to come to an end, according to Sanford C. Bernstein strategists.
This could be an area where European stocks, due to their low dependence on buybacks, could see help as a result.
Bernstein strategists led by Inigo Fraser-Jenkins said:
“This would remove one advantage of U.S. equities over Europe. As the buyback support is reduced it will make a stronger relative case for Europe.”
And the decision of the U.S. central bank to hold off on rate increases may have temporarily reduced concerns about debt hurting equities, but the topic is still on the table and credit spreads are expected to keep widening over the next year.
Furthermore, the significance of share repurchases to the US rally has been pronounced, with $1 trillion in buybacks in just 2018 alone, far overshadowing the $100 billion in net inflows from active and passive funds. And even though European equities have rallied to the tune of more than $1.5 trillion since December’s lows, shorting these stocks remains a popular trade globally, according to Bank of America Corp.’s latest fund manager survey. And many traders are still on the sidelines, as Europe’s ugly politics and mixed economic data continues to weigh on sentiment.
Stock funds in Europe have been hemorrhaging for nearly a year with outflows since the Brexit referendum reaching $139 billion. Redemptions have been so large that they have “erased the inflows fueled by Mario Draghi’s 2012 pledge to do whatever it takes to preserve the Euro.”
And although Bernstein strategists aren’t ready to make a buy call for European equities, low investor positioning, discounted valuations and anticipated support from reduced US buybacks are worth acknowledging, they note.
The analysts concluded: “Europe is uniquely hated. We like to be contrarian and so large outflows incline us to like a region. However, we are not quite ready to issue a ‘buy Europe’ call.”