European stocks draw record inflows amid surge in defence, infrastructure spending

European equities are experiencing a surge in investor interest, attracting the highest level of inflows in nearly a decade as expectations rise for a historic increase in defence and infrastructure spending.

According to Bank of America Corp., regional funds saw approximately $12 billion in inflows over the four weeks leading up to March 5, marking the largest influx since August 2015, Caliber.Az reports citing foreign media.

This wave of investment comes amid significant pledges from European leaders to ramp up military and infrastructure spending, particularly as the United States scales back its support for Ukraine. Key figures, including Germany’s Chancellor-in-waiting Friedrich Merz, have committed to unlocking hundreds of billions of euros for these initiatives. Weekly flows into European equities have now reached levels last seen before Russia's invasion of Ukraine in 2022, according to BofA strategists, including Michael Hartnett, in a recent note.

The potential consequences of Germany’s defense spending strategy are significant, Hartnett noted. The “whatever it takes” European rearmament pledge is expected to drive fiscal excess in the euro region, while the US prepares for a shift towards fiscal austerity with cuts to federal spending. As a result, Hartnett predicts that German bund yields are likely to surpass US Treasury yields by the end of the year.

The uptick in European stocks is further reflected in their strong performance relative to their US counterparts. The pan-European Stoxx 600 Index has risen by 8.5 per cent year-to-date, marking its best start to a year since 2015, while the S&P 500 has declined by 2.4 per cent. Meanwhile, the Nasdaq 100 is on the cusp of entering a technical correction.

However, this outperformance has led a separate team of Bank of America strategists to reassess their outlook on European equities. They have downgraded their stance on the region’s stocks versus global peers to "marketweight" from "overweight," signaling a shift in their investment strategy amidst the changing fiscal landscape.

By Vafa Guliyeva