USD bns of capital cross the Atlantic as investor confidence in the US wanes

Investors are increasingly diverting funds to Europe, viewing it as a more stable market amid the “absolute uncertainty” of US tariff policies and increased political intervention under President Donald Trump, Reuters reported yesterday, citing interviews with over a dozen executives and fund managers. Investors are being pushed from the US by fears that Trump’s tariff policies and tax cuts will harm corporate earnings, increase inflation, and widen the budget deficit. Meanwhile, Europe is pulling investors in with a new era of fiscal stimulus marked by increased government spending on defense and infrastructure — especially Germany — and aggressive interest rate cuts from the European Central Bank (ECB).

By the numbers: So far this year, investors have poured over USD 100 bn into European equity funds — a threefold y-o-y increase — while US funds recorded outflows of USD 87 bn, according to LSEG data. This shift is echoed in Germany, Europe’s largest economy, where foreign direct investment has more than doubled to EUR 46 bn over January-April 2025, reaching its highest level since 2022, according to Bundesbank data.

Investors’ rising appetite for European markets comes as a 9 July deadline approaches for a potential trade agreement between Washington and Brussels, with Trump threatening to impose 50% tariffs on all EU goods if no agreement is reached.

Ending a decade of underperformance, European markets dramatically outpaced the US in 1H 2025, with the pan-European Stoxx 600 index’s returns hitting 16% — outperforming “US peers by the biggest margin on record in USD terms during the first half,” Bloomberg reports. The EUR gained 13% y-o-y against the USD in 1H and is forecasted to reach USD 1.20 by year-end, up from USD 1.04 in 2024.

Investors are now overweight European equities (net 34%) and underweight US stocks (net 36%), a Bank of America survey shows. Meanwhile, European equity funds have seen a USD 46 bn inflow so far this year, compared to a USD 66 bn outflow last year. For fixed income, European bond funds have attracted over USD 42 bn, far outpacing the USD 5.6 bn flowing into US funds.

Despite the rally, European stocks remain attractively valued, trading at a 35% markdown to their US peers. They also offer higher dividends and comparable buyback yields, which Goldman Sachs’ Peter Oppenheimer expects to gain momentum. “While [earnings] growth in Europe may not be as strong as in the US, the valuation gap remains very big,” he said.

Analysts are split on Europe’s long-term outlook, with some cautioning that Europe’s prospectus window is temporary, with KfW’s Stefan Wintels warning, “This sentiment can quickly turn again.” A potential US rebound hinges on tech strength and Fed rate cuts, though structural changes in Europe’s fiscal policy provide a compelling long-term growth story.

Others see a more permanent shift, with UBS forecasting a EUR 1.2 tn (USD 1.4 tn) of capital rotation to European equities from the US in the next five years.

Not all sunshine and rainbows in the Eurozone: Despite rate cuts by the ECB, lending growth to Eurozone businesses stalled at 2.5% in May from 2.6% in April, as trade uncertainty and weak economic growth weighed on investment, Reuters reports, citing ECB data. The monthly flow of new business loans turned negative for the first time in over a year. While household lending growth edged up slightly to 2.0%, the M3 money supply indicator held steady at 3.9%, signaling a continued but anemic economic activity dominated by uncertainty.

MARKETS THIS MORNING-

Asia-Pacific markets are looking like a mixed bag in early trading today. Investors are once again fretting over US President Donald Trump’s tariff policies as a 90-day pause on higher tariffs — which came into effect in April to grant time for negotiations — is scheduled to expire next week, according to CNBC. Japan’s Nikkei and the Hang Seng Index are both in the red, while South Korea’s Kospi and China’s Shanghai index are each trading up so far. Meanwhile on Wall Street, futures suggest that markets will open just barely in the green.

THE CLOSING BELL-

The DFM rose 0.4% yesterday on turnover of AED 1.1 bn. The index is up 10.6% YTD.

In the green: United Foods Company (+14.8%), National General Ins. Company (+12.5%) and Amanat Holdings (+5.7%).

In the red: Agility The Public Warehousing Company (-4.1%), Chimera S&P UAE Shariah ETF (-2.2%) and Emirates Central Cooling Systems Corporation (-1.8%).

Over on the ADX, the index rose 0.7% on turnover of AED 2.4 bn. Meanwhile, Nasdaq Dubai was up 0.9%.