Julius Baer is rotating out of US equities into European equities, reflecting growing market sentiment.
'We have recently upgraded eurozone equities to overweight and US equities to underweight,' Christoph Riniker, head equity strategy research, said in an investment note.
'Eurozone equities started to outperform the US market in mid-2016. We see a number of fundamental reasons which make us believe in a continuation.'
Both equity ratings were changed on March 28, with eurozone equities being bumped up to overweight from neutral, and US equities being downgraded from neutral to underweight.
US equities had their worst week in 18 months in the week commencing April 5, seeing $14.5 billion leaving the sector.
European equities have been on the receiving end of the flows.
Value over growth
'Not only is earnings growth slightly superior in the eurozone but also valuation levels.
'Decomposing the market characteristics shows that eurozone equities comprise a higher cyclical exposure than the US market, are more value-driven and therefore of lower quality.'
'Taking this into consideration implicitly means, therefore, that we prefer value (now overweight) over quality and growth (both now underweight),' said Riniker.
According to him, a comparison of past equity market developments shows that rising political uncertainties and higher risk-aversion normally lead to an outperformance of quality stocks vs. the overall market.
'This might continue ahead of the French presidential elections but should substantially turn afterwards.'
He believes that with sentiment improving and investors becoming more risk-friendly again, the environment for quality investments is becoming increasingly challenging.
Furthermore, a generally turning bond yield environment is also supporting value exposure, he said.
'Based on our general outlook for equities, we would argue that this trend might continue for some time.
'A preference for eurozone equities and the financial sector implicitly call for a preference for the value style. This is supported by fading political uncertainty, increasing risk-awareness and rising bond yields.'
'Buy before the squeeze'
A note on European equities markets from Geoffroy Goenen, head of fundamental europe equity management at Candriam echoed the view.
'Global investors have refrained from investing in Europe for some time now,' he said in the note titled 'Buy before the squeeze'. 'Over the past three years, a gap of almost 30% has opened up between the European market and the US.'
He believes that the elections in 2017 and the Brexit will provide an opportunity to increase momentum towards greater integration, less centrifugal interference and ultimately improved political functioning.
'We are therefore convinced that once the elections are over, global investors will reinvest massively in the region, which we believe now appears historically compelling.'
He backed his bullish thesis with examples of positive newsflow, including job creations, faster growth, and even resurgent inflation towards normal levels, which was unthinkable two years ago.
In terms of valuations, Goenen believes 'Europe has never been such good value compared to the US.'