Global investment funds are leaving the Korea, Taiwan, and Japan markets that had been concentrated in AI Semiconductor stocks and are rushing into Europe. Long sidelined for having fewer tech stocks, European shares have set a record high for four straight sessions as money seeking to avoid AI volatility floods in. Analysts said the rally is unlikely to be a short-lived fad because European corporations' earnings have increased by the most in four years.
On the 7th, the pan-European STOXX Europe 600 closed at 660.25, logging a record high closing price for the fourth straight session. The index, which groups 600 listed companies from 17 European countries, is up about 11% this year and, along with Germany's DAX, France's CAC 40, and Italy's FTSE MIB, continues its march of record high levels.
According to London Stock Exchange Group (LSEG) data, global investors poured $12.52 billion (about 17.6 trillion won) into European equity funds over the five most recent trading days from the 30th of last month to the 5th of this month. That was 35% more than flows into Asia equity funds over the same period, which totaled $8.15 billion (about 11.5 trillion won). In contrast, $1.58 billion (about 2.2 trillion won) flowed out of U.S. equity funds. BlackRock, the world's largest asset manager, said $4.4 billion (about 6.2 trillion won) went into its European equity products in July alone. BlackRock told the Financial Times (FT) the money was "evidence of asset allocation seeking to step away from increasingly volatile semiconductor stocks."
A Bank of America (BofA) survey of global fund managers also showed that through June, the share of respondents who said they were underweight European equities exceeded those overweight by 15 percentage points, but in July the balance flipped, with overweight responses ahead by 2 percentage points.
While money has been flowing into Europe, foreigners sold stocks in Korea and Taiwan at a record pace, even though those markets led the global rally in the first half of the year. According to Reuters, foreigners were net sellers of $137.36 billion (about 193 trillion won) of shares across seven Asian markets, including Korea, Taiwan, and India, in the first half. It was the fastest pace of outflows since related statistics began in 2010. During this period alone, $70.8 billion (about 99.7 trillion won) left Korea and $29.6 billion (about 41.7 trillion won) left Taiwan.
Even so, the KOSPI nearly doubled in the first half. Taiwan's Taiex also rose 62%. Samsung Electronics(005930) and SK hynix(000660), and AI Semiconductor names like TSMC repeatedly surged, prompting institutions to increase their weightings in those stocks. However, after the semiconductor rally, those institutions sold the winners to lock in gains as part of rebalancing to reduce concentrated exposures.
Japan's market, where foreigners recorded a half-year record by net buying 9.7 trillion yen in the first half, also could not avoid this correction. The Nikkei 225 hit a record high on June 25, then fell more than 11% from the peak amid a global sell-off in semiconductor stocks in July. On the 17th of last month, memory chip corporation Kioxia plunged 16% in a single day. Joshua Crabb, head of Asia-Pacific equities at Robeco, told Reuters, "In Asia, only two markets and one sector are leading," adding, "In the end, portfolios must be balanced."
In European shares, banks, insurers, industrials, and healthcare corporations carry significant weight. Tech stocks are far fewer than in the United States and Asia. This composition was cited as a weakness that kept Europe from rising while AI names were lifting indexes. But after global semiconductor stocks slumped in July, Europe began to be reappraised as a diversification tool to avoid volatility. Beata Manthey, head of European equity strategy at Citigroup, told Bloomberg on the 9th, "Investors who continue to hold tech will diversify more of their asset into cyclical sectors," adding, "The beneficiary of that is European equities."
That does not mean Europe missed the entire AI rally. Dutch chip equipment maker ASML and German chip designer and manufacturer Infineon Technologies AG have each climbed more than 60% this year, leading gains in the STOXX Europe 600. A Bank of America index built around European corporations boosting productivity by adopting AI—such as industrial automation firm ABB and power company E.On—has risen 14% this year, outpacing the gain of large U.S. cloud companies (3%).
European corporations are also posting strong results this year, meeting investor expectations for the first time in a while. LSEG data show net profit for STOXX Europe 600 corporations is set to rise more than 22% in the second quarter from a year earlier, the biggest increase since the third quarter of 2022. The eurozone (21 countries using the euro) economy also grew 0.4% in the second quarter under the burden of high energy prices, beating market expectations.
Banks in particular have grown both interest revenue and trading revenue amid high rates and heightened market volatility left by the war. The STOXX Europe 600 Banks index is up more than 21% this year, nearly double the overall index's 11% gain. BNP Paribas, one of Europe's major banks, increased its second-quarter net profit by about one-third. Universal financial group UBS posted a record quarterly profit, up 17%.
European shares lagged U.S. stocks throughout the second quarter as oil and gas prices spiked at the end of February due to the U.S.-Iran war and the closure of the Strait of Hormuz, and because of Europe's high dependence on imported energy. Recently, however, international oil prices have fallen below $90 a barrel from their July peak as expectations for talks between the United States and Iran have grown. With that, inflation pressures weighing on European shares and concerns over rising corporate expense have eased, spreading benefits to autos, airlines, and consumer stocks.
Daniel Murray, deputy chief investment officer at EFG Asset Management, told Bloomberg on the 9th, "Skepticism toward European stocks had gone too far," adding, "We started from a negative position, but investor sentiment is improving."