Massive Capital Flows from the U.S. to Europe: What's it all about?
  • Jonathan Rowe
  • 28.03.2024

Since the beginning of the year, there has been a trend of partial capital flows to Europe. There are at least four reasons for this. The main reason is the fear of recession in the US this year. The second reason is related to the first one and is that Wall Street is spreading the opinion that the American market is overheated and stocks are overvalued. The third reason is the stabilization of the EU economy due to buying shocks related to the beginning of Russia's war against Ukraine and first of all stabilization of the gas market.

And the last possible reason is that despite the general recession not all sectors of the European economy are in crisis. Some sectors and individual companies are doing well, especially the following sectors:

  • Biotechnology;
  • Semiconductor manufacturing
  • IT;
  • Telecommunications;
  • Pharmaceuticals.

European health care and biotech companies performed well during the Covid-19 pandemic and thus received a local dose of PR. In addition, the European continent is leading the fight against climate change and in many countries of the union more than 50% of electricity is generated in an environmentally friendly way.

Other companies from the above industries have also shown resilience during the recent economic crises and generally against the backdrop of systemic problems in the European economy.

The European STOXX 600 index managed to grow by 6.5% in the first three months of this year. This is less than the S&P500 grew by 9.6% during the same time. However, these are not the final results and it will be a long time before the final results. Although according to the forecasts of the European Commission, the European GDP growth is expected to be 0.9% compared to the projected impressive growth of 2.4% in the U.S. GDP.

Why is it that despite this asymmetry between projected US and European growth, capital is flowing elsewhere rather than to the US? In addition to the reasons mentioned above, one possible explanation is that many European companies are undervalued due to the capital outflows seen in previous years.

There are also more and more opinions that the S&P500 is highly overvalued and compared to it the European market certainly looks calmer and less overheated. At the same time, the European STOXX 600 index has been steadily growing for the last three months and is generally considered to be much less overvalued than its American counterpart.

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