Europe gains traction amid doubts over US assets, global money managers say

Goldman Sachs and JPMorgan asset management executives report increased investor interest in European assets amid concerns about U.S. trade policy and potential recession risks. Investors are reportedly trimming U.S. exposure, hedging the dollar, and reallocating capital to Europe and Asia, with European equity ETFs seeing significantly higher inflows than U.S. counterparts this year; however, most investors are only trimming and not fully exiting U.S. positions.

Analysis

Asset management executives at Goldman Sachs and JPMorgan are observing a discernible shift in investor sentiment, characterized by increased enquiries about U.S. asset resilience and a tangible reallocation of capital towards European and Asian markets. This trend is primarily driven by concerns over potential U.S. trade-related market turmoil, stemming from President Trump's threatened "reciprocal" tariffs, and heightened fears of a U.S. recession following an April market downturn. Morningstar data underscores this shift, revealing European equity ETFs have attracted 34 billion euros in the year to May 16, starkly contrasting with the 8.2 billion euros flowing into U.S. equity funds—a significant reversal from the previous 8:1 dominance of U.S.-focused products in Europe. Investors are reportedly trimming U.S. exposure, with Matt Gibson of Goldman Sachs Asset Management noting clients are questioning if the U.S. stock market boom, particularly the "Magnificent 7" tech stocks, has peaked. While not a full exit from U.S. assets, actions include hedging the dollar, taking profits on U.S. companies, and increasing cash holdings. JPMorgan Asset Management corroborates this, citing stronger client interest in European investments, including private assets, partly due to increased government spending plans in countries like Germany. Consequently, firms like Goldman Sachs are advising clients on reintroducing asset and currency hedges to mitigate these emerging risks. The overall sentiment is cautious, reflecting the uncertain U.S. policy landscape.

Key Decisions for Investors

• Consider tactically reducing U.S. equity exposure, particularly in growth-heavy sectors that have seen significant appreciation, and reallocating towards relatively undervalued European and select Asian markets.
• Evaluate and potentially implement currency hedging strategies, specifically for U.S. dollar-denominated assets, given the reported increase in dollar hedging and ongoing concerns about U.S. economic and trade policies.
• Monitor upcoming U.S. trade policy announcements and economic indicators closely, as these are key catalysts for potential market volatility and further shifts in capital flows.
• Explore opportunities in European assets, including private markets, which may benefit from increased fiscal stimulus and a more favorable relative valuation compared to U.S. counterparts.