Investors are less bullish on EU stocks near-term, BofA's survey shows

Bank of America's August European Fund Manager Survey reveals a nuanced investor sentiment: short-term enthusiasm for European equities has cooled, with only 15% expecting a rise (down from 37% in July), and 50% believing tariff shock is largely unpriced. However, long-term optimism persists, with 88% anticipating upside over the next 12 months. Positioning reflects this, as net overweight in European equities fell to 25%, and a majority (54%) now expect Europe's structural underperformance to continue due to political headwinds and weaker earnings. Sector preferences remain skewed towards financials, while doubts about cyclicals are rising, and moderated macro growth expectations for Europe still exceed the global outlook, with German fiscal stimulus as the top catalyst.

Analysis

Bank of America's August European Fund Manager Survey reveals a significant divergence between short-term caution and long-term optimism regarding European equities. Near-term sentiment has cooled considerably, with the net percentage of investors expecting a rise in European stocks falling to 15% from 37% in July, and 31% now anticipating a downside. This caution is underpinned by concerns that tariff shocks are not fully priced in, as cited by 50% of respondents, and a sharp increase in the belief that Europe's structural underperformance will persist (54%, up from 26%) due to political headwinds and weaker earnings growth. This sentiment is mirrored in positioning, with the net overweight in European equities declining to 25% from a 41% peak in July. A key tactical shift is evident in the style rotation, where a net 1% of managers now expect cyclicals to underperform defensives, a stark reversal from a net 37% expecting outperformance last month. Sector allocations remain firmly in favor of financials, the largest consensus overweight, while macro growth expectations for the region, though moderated, are primarily dependent on German fiscal stimulus, which 69% of managers see as the main catalyst for acceleration.

Key Decisions for Investors

• Given the sharp decline in short-term sentiment and the belief that tariff risks are under-priced, investors may consider reducing tactical exposure to European equities or implementing hedges against near-term volatility.
• A significant rotation out of cyclical stocks is underway; therefore, it is prudent to review and potentially reduce exposure to sectors like autos and retail, while considering overweight positions in financials, which remain the consensus pick for outperformance.
• Monitor German fiscal policy closely, as it is viewed by a 69% majority of fund managers as the most critical catalyst for European growth, representing a key variable for the market's trajectory over the next year.
• Despite near-term pessimism, the survey shows 88% of managers expect upside over 12 months, suggesting that long-term investors could view the current cautious environment as a potential accumulation opportunity.