Return of fund investors drives European stock rally

Reuters

* Institutional EMEA liquidity on Liquidnet up 42 pct

* Spain, Portugal, Greece see some of strongest pick-up

* Fund holdings of euro zone stocks at 20-month high

By Toni Vorobyova

LONDON, Nov 1 (Reuters) - Institutional investors have comeback in force to European equities this year, gaining theconfidence to do bigger trades and prompting a fresh focus oncompany fundamentals.

The return of pension funds and top asset managers toEuropean equities bodes well for a market that had beendominated by speculative, high frequency traders through theyears of the financial crisis, leading to high volatility and adisconnect between companies' health and share performance.

Average daily liquidity in EMEA in Liquidnet - a platformwhich allows some 700 institutional investors globally to tradeanonymously - jumped 42 percent to $19.7 billion inJanuary-September compared to last year. That marks the biggestrise in principal traded since 2009 for EMEA, contrasting with adrop in overall market volumes reported by banks.

The trend has continued into October, as the STOXX Europe600 index set five-year highs, up 16 percent this yearand rewarding investors for their confidence in the region.

"Europe has outperformed for Liquidnet globally. We haveseen an increase in inflows from the U.S. into Europe, and anoverall increase in investor confidence which has resulted in astrong desire to trade blocks in Europe," Mark Pumfrey, CEO ofLiquidnet Europe, told Reuters.

"The biggest liquidity increases we've seen are in themarkets that were most damaged by the financial crisis. Ifyou're an institution that thinks the euro will survive, thencompanies that were priced low 18 months ago are going to lookvery cheap (today)."

Liquidity in Spain more than doubled, Portugal rose 166percent and Greece jumped 281 percent, albeit from low levels.

"For us, Europe is definitely one of the areas to beoverweight into next year," said Veronica Peculate, head ofglobal equities at Ashburn.

"We have been historically very underweight the periphery,but now we are much more broadly spread."

That chimes with the Reuters global asset allocation poll,released on Thursday, showing holdings of euro zone equitiesrising for the fourth month in a row to a 20-month high.

GOOD NEWS FOR MARKETS

Backing the trend seen on Liquidnet, the percentage of STOXXEurope 600 shares held in lending programmes of institutionalinvestors has risen to nearly 18.5 percent from less than 17.5percent in January, according to Markit.

"It's not a huge increase, but could be taken as supportingevidence that international institutional investors areincreasing exposure to Europe," said Alex Borg, director atMarkit, adding that the data suggests investor overweights ineconomically sensitive software, real estate and tech hardware.

The institutional investors are also doing bigger trades, assigns of economic recovery in Europe and progress in resolvingthe euro zone debt crisis have restored confidence.

Since the end of June, trade in large blocks of over $1million on Liquidnet - which has a 73 percent market share insuch deals - has totalled $15.8 billion - already 55 percentmore than for the whole of the second half of 2012. The averageexecutions' size has risen to a two-year high of $1.3 million.

"It's good news. Investors that are focused on long-termfundamentals have been inclined to trade more this year ... andit really reflects the overall macro environment, which isn'tperfect by any means but is much better than it was 18 monthsago," Liquidnet's Pumfrey said.

"When institutional investors are trading, it's a muchhealthier position for the market - you really don't wantfundamental investors pulling away."

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