U.S. stocks have had quite a run this year. But investors have poured into stocks in general and we're on course for the biggest equity inflows since 2004.
Investors have also taken the opportunity to move into stocks outside the U.S.
In fact, investors began pouring into European stocks around the same time the region started to emerge from its recession. Though the initial wave can be traced back to when European Central Bank chief Mario Draghi promised to do "whatever it takes" to save the euro.
European stocks have had a good third quarter, with a return of 8% on MSCI Europe. This in a backdrop of concerns about the Fed tapering its $85 billion monthly asset purchase program, the emerging market crisis, and concerns about the formation of government in Germany.
European equities have now seen 21 straight weeks of inflows, according to Bank of America's Michael Hartnett. On a rolling-three month basis, inflows into European equity funds exceed inflows to U.S. equity funds as a percent of assets under management (AUM) by the widest margin since April 2009.
With all this in mind should investors consider adding to European positions or diversifying into them if they still haven't?
Investors should ask their advisors to go over their asset allocation again, and understand how such a diversification would affect their portfolio. It's important to know if this would fit in with their end goals.
They should also ask if their exposure should be to individual countries or to a benchmark index.
Investors also need to understand the risks that come with investing in European companies and understand the economic exposure the companies bring.
The bullishness on European stocks has stemmed from a few key factors, points outs Dario Perkins of Lombard Street Research. 1. Concerns over a breakdown of the European Monetary Union have faded. 2. The European economy is beginning to recovery. 3. Profitability in Europe would increase as a result of "supply-side reforms and improving competitiveness." 4. European stocks are cheaper than U.S. stocks.
But investors need to hash out this out with their advisors and see if the optimism is in fact warranted.
Finally, they should also ask their advisors if there are any alternative European assets that might be a better fit for them.
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