Europe’s Style Cycle Enters 16th Straight Month of Recovery, Longest on Record: BofA
Summary
Bank of America data shows Europe's Recovery-style cycle has reached a record 16 months, driven by improving macro indicators like Germany's IFO index and GDP forecasts. This phase favors risk-on equity styles including Value, Momentum, Low Quality, and Small-Mid caps. Fund flows reflect this trend, with significant inflows into European equity funds, particularly passive strategies and sectors like Industrials and Size factors, while UK equities and Quality stocks saw outflows.
Europe's Recovery Style Cycle Extends to Record 16 Months, BofA Data Shows
Bank of America's latest analysis indicates that the European Composite Macro Indicator (CMI) continued its upward trend in June, marking the 16th consecutive month of the continent's Recovery-style cycle. This represents the longest such phase on record, signaling a sustained macroeconomic improvement that is particularly favorable for risk-on equity styles, even amidst persistent geopolitical and inflationary pressures.
Outperforming Equity Styles in the Recovery Phase
During this prolonged Recovery phase, several specific equity styles have demonstrated notable outperformance:
- Value stocks are favored over Growth stocks.
- Rising Momentum stocks are showing strength.
- Low Quality and High Risk names are performing well.
- Small-Mid capitalization stocks are outperforming Large caps.
According to BofA, a curated basket of top-performing Recovery-style stocks significantly outperformed bottom-ranked names by 4.5% in the past month, underscoring the robustness of the current market regime.
Macroeconomic Drivers of the Recovery
The strength of the European Composite Macro Indicator is primarily being driven by several positive macroeconomic inputs:
- A substantial increase in Germany's IFO index, a key gauge of business sentiment.
- An improvement in European 10-year bond yields.
- Upgraded European GDP forecasts.
Conversely, a decline in European PPI inflation acted as the most significant drag on the composite indicator.
Investor Positioning Reflects Growing Optimism
Investor fund flows are largely aligning with the prevailing Recovery thesis:
- Europe-focused equity funds recorded net inflows totaling $3.21 billion over the last four weeks.
- Passive funds saw significant inflows of +$5.98 billion.
- Active funds experienced net outflows of -$2.76 billion.
Sectors and regions attracting the largest inflows included:
- Size factor stocks: +$2.87 billion
- Industrials: +$1.54 billion
- Switzerland: +$0.26 billion
Areas experiencing notable outflows were:
- UK equities: -$2.66 billion
- Quality stocks: -$0.44 billion
- Financials: -$0.07 billion
Explore European Market Trends
To delve deeper into the performance of sectors benefiting from this macroeconomic uptrend, consider utilizing the Sector Historical API. For more detailed valuation insights on outperforming industries such as Industrials or Small-Mid Caps, the Industry P/E Ratio API can provide valuable data.