As for outflows, they are not a leading indicator of poor performance. Since March we have now seen 18 weeks of consecutive outflows from Europe, totalling more than $50bn. This is the second largest outflow streak on record.
However, outside of the financial crisis in 2008, the five largest streaks of outflows were followed by strong positive returns over the next 12 months.
Italy is another source of tension for investors, with fears it is on the verge of leaving the euro and will cause the collapse of the currency union.
The reality is support for the euro has increased in Italy and we believe the populist shift in the country does not present real systemic risk. In fact, some of the more unorthodox proposals of the government could even offer a much-needed boost to the stagnant Italian economy.
With technology stocks dominating market performance, it is true Europe is structurally underexposed to the space. However, tech has been the biggest contributor to our recent outperformance.
Europe’s Stoxx 600 index has only a 5 per cent exposure to technology, with SAP and ASML accounting for almost half of the index weight.
This highlights a clear flaw in passive investing, which myopically focuses on investing in the largest companies, regardless of quality and growth prospects.
Even though European technology stocks have significantly outperformed the market over the past one, three, five and 10 years, the passive investor has not benefited much from the sector’s returns.
While the current stretch of European underperformance is unprecedented both in length and magnitude, we believe the market is well positioned for an overdue catch-up.
As the US enters its late cycle phase, it is time for more investors to take a closer look at Europe.
Stuart Mitchell is chief investment officer of S W Mitchell Capital
