HSBC: The flow of funds has changed, continuing to flow from the United States to Europe! Cyclical stocks are favored.

This article is excerpted from a research report released by HSBC on March 28. Investor Allocation Stock funds continue to flow into Europe, mainly from the US. European funds have increased their allocation to cyclical stocks, relatively reducing defensive stock allocation, and still have further adjustment space. In Europe, financial stocks are attractive, with improving prospects for both buyers and sellers, and there is room for reducing holdings in energy stocks. European stock markets continue to lead globally Although global stock markets have risen by 0.2% year-to-date, there are differences in regional returns. Emerging markets have performed well this year (up 3.8% relative to the FTSE Global Index, which fell 3.2% in 2024), while Europe (up 8.5% relative to any weighted index) leads among developed markets. The trend of funds flowing out of the US and into European stock markets is widespread. For example, the funds flowing into European stock funds in 2025 are the highest recorded in the first 12 weeks since 2015. Similarly, funds continue to flow into European regional funds. (Funds flowing into European stock funds exceed those flowing into US stock funds.) (Increased volatility may affect investor sentiment; usually leading to a decrease in fund inflows) (Global funds significantly reduced holdings in US assets; Europe is the main beneficiary) Buyer prospects are improving, and seller views are relatively consistent. Sellers believe that European 2025 earnings growth expectations are relatively good, while US earnings expectations (Q4) are declining. Although increasing market volatility may affect investor sentiment and have a negative impact on fund inflows, we expect investor preference for the European stock market to continue in the coming weeks. Further room for funds to flow into Europe Global funds have increased their allocation to European stocks by 24 percentage points over the past three weeks. At the same time, holdings in US stocks have correspondingly decreased by 29 percentage points. Fiscal stimulus measures announced in the region and cautious optimism in business sentiment indicators could further enhance market constructive sentiment. Additionally, seller prospects have improved in the European stock market, and the expected pace of rate cuts has slowed down. Although EPS growth expectations for major regions in 2025 have been generally lowered, the decrease in Europe (-0.5 percentage points) is smaller than that in the US (-2.7 percentage points). We are bullish on European financial stocks, but bearish on energy stocks After a slight decrease in holdings of cyclical stocks in European stock funds last month, they have resumed buying cyclical stocks. With seller prospects improving and signs of a bottom in business sentiment indicators, there is still room for further increase in cyclical stock holdings, which are currently above the 5-year average level. Among all sectors, we are bullish on European financial stocks. We have increased the weight of financial stocks to a buy rating in regional sector weighting, primarily based on improved seller prospects and the expected slowdown in rate cuts in 2025, which could be favorable for the sector's profits. In fact, regional funds have also increased their holdings in this sector, achieving a balanced allocation among major subsectors such as banks, insurance, and financial services. In addition, we believe there is room for regional stock funds to reduce holdings in energy stocks, which are still above the 5-year average level. The earnings growth expectations for the European energy sector in 2025 are the lowest among sectors, with poor earnings prospects and a downward trend. Given the significant volatility and increased downside risks in energy prices in 2025, we expect a decrease in energy stock holdings. Capital flows: Capital continues to flow into Europe So far this year, funds flowing into European stock funds account for 4.5% of total fund assets (AuM), exceeding the funds flowing into US stock funds (0.7% of AuM) during the same period. This clearly reflects investors' optimism towards European stocks. Looking ahead, funds may continue to flow into European stocks, although increased uncertainty may affect overall sentiment towards risk assets. Fiscal stimulus measures announced in the region may serve as a structural catalyst, and the cautious optimism in business sentiment indicators may further enhance overall positive sentiment. However, we believe that the threat of US tariffs still poses a downside risk. Positioning: Better prospects for sellers We find a similar trend among global funds (targeting global benchmarks), with funds mainly flowing out of the US and into Europe. Over the past month, fund allocation to US assets has decreased by 29 basis points, while holdings in European assets have increased by 24 basis points. Although global fund holdings in European assets are currently above long-term average levels (exceeding the Eurozone by 0.6 standard deviations and the UK by 1.7 standard deviations), we believe there is still room for further increase, especially in the Eurozone. As we have emphasized recently, expectations for EPS growth in 2025 are generally becoming more cautious, but the consensus growth expectations in Europe have decreased less than the US. The trend of EPS expectations for the FTSE Europe Index in 2025 is relatively more positive. 2025 EPS Expectations Trend: Better prospects for European stock market - the red line represents the relative EPS expectations trend between Europe and the US, showing fluctuations during the period, with recent upward trends.