In a major strategy shift, U.S.-based hedge funds are ditching American equities and shifting capital into European stocks.
In an analysis, investment bank Morgan Stanley (MS) says that hedge funds “have bought EU equities in nearly 70% of the trading sessions” since the European stock market began to rally in January of this year.
Hedge fund exposure to Europe has grown from below 17% at the end of 2023 to roughly 19% currently, says Morgan Stanley.
The move into European stocks comes amid growing concerns that U.S. equities have become too expensive and are now overbought.
Europe's main STOXX 600 index is up 6.5% so far this year, lagging the 10% gain in the benchmark S&P 500 index in the U.S.
The S&P 500 index currently trades at 21 times forward earnings estimates, while European equities are trading at 14 times, according to data from Bank of America (BAC).
Morgan Stanley says that hedge funds are mostly adding long positions to Europe, betting that stocks will rise throughout this year.
Sectors where hedge funds are allocating capital include information technology, industrials, semiconductors, electrical equipment, and life sciences.
In a recent note to clients, investment bank Goldman Sachs (GS) said that “Europe has room to catch up with the U.S.” as the discount between both is the deepest it has ever been.
Popular European stocks among hedge funds include Danish pharmaceutical giant Novo Nordisk (NVO), Dutch semiconductor concern ASML Holding (ASML), and Swiss insurer Chubb (CB).
