European equity funds had outflows for first time in two years in March

By Patturaja Murugaboopathy

(Reuters) – European equity funds faced their first monthly outflow in two years in March as the Russia-Ukraine conflict and rising energy prices hurt prospects for profit growth and margins this year.

According to Refinitiv Lipper, European equity funds witnessed an outflow of $27 billion last month, their first outflow since March 2020.

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At the same time, U.S. equity funds received $20 billion, and Asian equity funds obtained $8.7 billion in March, the data showed.

The divergence in flows highlights investors’ reluctance to be exposed to markets deemed vulnerable to the ongoing conflict and on account of Europe’s higher trade links with Russia and Ukraine.

Analysts expect higher inflation levels will raise companies’ input costs and squeeze their profit margins.

Euro zone inflation surged to a record 7.5% in March, as the war in Ukraine and sanctions on Russia pushed fuel and natural gas prices to record highs.

“The growth outlook is slowing,” Sarah McCarthy, analyst at Bernstein, said in a note.

“It is easy to raise prices to counteract increases in input costs when the economy is roaring, less easy in a slowdown.”

The data showed Zwitserleven Duurzaam Index Aandelenfonds Europa had outflows worth $912 million, while BlackRock European Dynamic A Acc and iShares MSCI Eurozone ETF faced outflows worth $503 million and $468 million respectively last month.

Last month, Morgan Stanley lowered its earnings per share growth forecast for Europe to 3% in 2022 from its earlier forecast of 10%.

“With real GDP growth set to fall below inflation in 2022, margins could fall about 100 basis points this year,” the brokerage said.

According to Refinitiv data, Euro zone’s large and mid-cap companies’ earnings are expected to grow 4.4% this year, much lesser than the U.S. firms’ growth of 10.3% and Asia’s 15.3%.

Europe’s STOXX 600 has declined 6% so far this year.

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According to Refinitiv data, MSCI Europe’s forward 12-month price-to-earnings ratio stood at 13.9, which is roughly a 20% discount to the MSCI World index’s P/E of 17.4.

(Reporting by Patturaja Murugaboopathy; Editing by Vidya Ranganathan and Lisa Shumaker)