European equity UCITS are turning away from local stock investments, according to a recent report from EFAMA, necessitating “urgent action”.
This is a Europe-specific trend, the paper noted, with the majority of equity funds domiciled in the US and APAC prioritising local stocks in their portfolios – 78% and 84%, respectively. In the EU and UK, however, these figures are just 27% and 29%.
Reasons for this difference include advice from financial advisors, the benefits of cross-border investments, and the development of platforms that allow for investments in funds that track global indices, the paper said.
The comparatively small size of EU stock markets and enthusiasm for leading US technology companies have played a role in European allocation patterns, the paper added.
The US is a particular area of choice for equity UCITS to invest, as highlighted in the recent report from Enrico Leta; allocations have risen from 19.2% in 2012 to 44.6% at year-end 2023. EFAMA attributes this US success to population growth, increased research and development spending, reduced energy prices and fiscal stimuli.
In order to attract capital to the EU economy, Europe must “unlock the potential of the single market”. This includes reorienting the Retail Investment Strategy to encourage greater investment in capital market instruments from EU citizens and promoting retirement saving, which will help to bolster the EU’s available savings pool. A robust Capital Markets Union should also be established, per the paper, to provide more and better opportunities and outcomes for European companies and savers.
Additionally, “urgent action is needed to fix the root causes of the EU economy’s subdued growth outlook and enhance investment opportunities and returns,” the paper stated.
Commenting on the report, Bernard Delbecque, senior director at EFAMA, commented: “A decisive shift in EU policies, particularly competition and industrial policies, is required to enhance investment opportunities, boost the valuation of Europe-based companies in global stock indices, and increase asset owners’ investments towards EU companies. Once asset owners foresee more promising prospects in the EU, they will increase their investments in the region, thereby supporting the financing of the green and digital transitions.”
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