London: Investors have had enough of Europe.

Amid a global selloff that has sent the Standard & Poor’s 500 Index down 5.2% in three weeks, losses have been almost twice as big in the Euro Stoxx 50 Index, where last week’s 4.5% retreat was the largest since 2012. A record $1 billion was withdrawn from an exchange-traded fund tracking Europe in the period as Mario Draghi, the central-bank president, warned of signs the recovery is losing momentum.

Investors are bailing as the economy threatens to fall back into another recession just after ending the longest contraction in its history last year. Equity losses approaching $1.6 trillion since September mark a reversal for markets that fund managers named as the favourites as recently as July.

“Last week really shook markets, and Europe found itself in the spotlight for all the wrong reasons," said Jeremy Gaudichon, who manages European equities at KBL Richelieu Gestion in Paris. “It’s crazy that we’re even talking about the risk of recession again. Of course international investors would want to cut their exposure."

The Euro Stoxx 50 has tumbled for three consecutive weeks, the longest streak since June 2013. Valuations are failing to provide a floor, with companies in the gauge trading at 13.6% projected profits, up 84% from a low in September 2011 and 20% higher than the five-year average.

The European gauge dropped 0.6% at 8:17am in London on Monday. US index futures trading also signalled more losses, with December contracts on the S&P 500 down 0.3%.

Cash pulled

After adding money into the Vanguard FTSE Europe ETF for eight straight quarters, investors took out almost $2 billion in the last three months, the most ever, data compiled by Bloomberg show. They pulled a record $293 million from the iShares MSCI Italy Capped ETF and $50 million from the iShares MSCI Spain Capped ETF, the first withdrawal in two years. The iShares MSCI Germany ETF had a third quarter of outflows.

Economic reports this month showed investors have reason for concern. Industrial production in Germany tumbled the most since 2009 in August, while French manufacturing contracted for a fifth month in September while expanding at a slower pace in Spain. Economists forecast Italy’s gross domestic product will probably shrink for a third year. S&P lowered France’s credit-rating outlook to negative from stable on 10 October.

Outlook cut

The International Monetary Fund (IMF) cut its outlook for growth in the euro area last week and said the region faces the risk of a recession. The currency bloc will expand 1.3% next year, slower than the 1.5% pace predicted in July, after a 0.8% gain in 2014, the IMF said. It projects the US economy will expand 2.2% this year and 3.1% in 2015, more than previously estimated.

European executives are tempering forecasts. Shares of MAN SE, controlled by Volkswagen AG, have slipped two straight quarters and the company said on 25 September that weaker demand in the region will cut into profit and sales at its truck and bus division this year.

Dutch package-delivery company TNT Express NV tumbled 9.6% on 24 September after lowering its profitability forecast because of slower economic growth in Europe.

A Bank of America Corp.’s global fund-manager survey conducted in September showed 18% of respondents were overweight euro-area stocks, meaning they owned more of the shares than are represented in equity benchmark gauges. That’s down from a net 43% in June and 35% in July. Investors’ allocation to Europe was the heaviest among all regions until then, according to the bank’s polls.

Money elsewhere

“US investors feel like they’ve made sufficient money out of the Europe relative trade," said Ros Price, who helps oversee about $11 billion as chief investment strategist at Seven Investment Management Ltd in London. “With worrying signs that the economy might be rolling over, and European equities not cheap anymore, it’s no wonder people want to move their money elsewhere."

To combat falling prices, boost lending and bring back economic growth, Draghi cut the European Central Bank’s three main interest rates last month and announced an asset-buying plan. The measures and a falling euro will buy more time for it to take hold, according to Matthew Garman, a strategist at Morgan Stanley in London. In the US, the Federal Reserve will probably end its bond-purchasing program this month, and speculation has risen that it will increase interest rates earlier than anticipated.

Valuation support

“You don’t necessarily have to believe in major reform or economic progress to be constructive on Europe here," Garman said. “When you see a divergence in monetary policy, you tend to see a similar shift in the relative valuations. The ECB’s measures provide more valuation support for Europe."

The Euro Stoxx 50’s valuation of 13.6 times estimated profits compares with 15.8 for the S&P 500, according to data compiled by Bloomberg. The euro weakened to a two-year low versus the dollar on 3 October.

Still, investors are turning skeptical that profits will match analyst estimates. Earnings are projected to climb an average of more than 13% next year in Europe after rising 6.2% in 2014, according to more than 10,000 estimates compiled by Bloomberg. That would compare with a 10% gain for S&P 500 companies in 2015 and 7.8% this year.

“There is always a risk, and Europe has a habit of disappointing," Robert Griffiths, a global equity strategist at Credit Suisse Group AG, said by phone from London. “A lot of it is down to your belief in the ECB to drive the domestic recovery. What makes us a touch nervous is that consensus is still very aggressive for European earnings for this year and next year."

50% jump

The Euro Stoxx 50 has gained 50% from its low in September 2011 amid a halting recovery in earnings. Profits dropped 8% in 2013, rose only 1% in 2012 and fell 11% in 2011, according to data compiled by Bloomberg News. By contrast, earnings at S&P 500 members climbed 2.6% last year, 1.7% in 2012 and 9.4% in 2011.

European equities have narrowly avoided corrections this year. The Euro Stoxx 50 dropped 9.3% in August from its six-year high reached two months earlier. After recouping most of those losses by September, it tumbled 8.7% and closed at its lowest level since February last week.

“We’ve been holding on to European stocks and betting on growth for so long," said Heinz-Gerd Sonnenschein, a strategist at Deutsche Postbank AG in Bonn. “People have grown impatient of waiting. They will want to pull money out of Europe and come back when they finally see a real, fundamental improvement." Bloomberg

Wendy Soong in New York contributed to this story.

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