By David Marsh, MarketWatch
LONDON (MarketWatch) — Globalization is on the march in Europe as foreign investors increase their relative holdings of equities in the U.K. and Germany to record highs.
New data highlight how, during the 18-month recession in the euro area that ended in the second quarter this year, international buyers swooped on European stocks to take advantage of low valuations and high corporate growth potential despite severe regional economic problems.
There is continued concern over the future of the euro /zigman2/quotes/210561242/realtime/sampled EURUSD -0.0601% area — underlined over the weekend by heightened political uncertainties in Germany, Italy and Austria. But a winning combination of buoyant European corporate earnings and leadership in key technology segments, allied with the fading attractions of bonds, has driven large-scale buying of European stocks particularly by U.S. institutional investors.
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A key factor is the increased global nature of many European companies, which have increasingly emancipated themselves from dependence on the European economy and are trading with and investing in the whole world.
Benefiting from stable and reliable European legal and financial procedures and from openness with the rest of the world, European stocks are proxies for the onward march of globalization — and have been corresponding favorites for cross-border investors seeking global exposure at comparatively low risk.
According to Goldman Sachs, U.S. investors acquired $65 billion in European stocks in the first half of 2013, the highest comparable total since 1977, highlighting a big increase in confidence in the region after an earlier diminution of sentiment wrought by the sovereign-debt crisis.
The big question is whether this will persist now that Europe is showing signs of an “autumn of discontent” in leading members of monetary union. Coalition formation in Germany after the inconclusive elections on Sept. 22 could be stymied by strong differences over possible tax increases between the two members of a putative Grand Coalition, the Christian Democrats and the Social Democrats.
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In Italy, the fragile coalition of Prime Minister Enrico Letta is in danger of breakup after maverick former PM Silvio Berlusconi called on his ministers to leave the government in an attempt to head off his expulsion from the Senate, house arrest for a year and a ban on holding public office. In Austria, yesterday’s elections saw the Grand Coalition confirmed in office but a sharp move to the euro-skeptic right, complicating further support in Vienna for European bailout packages.
Despite the unpromising background, over the last year or so, pension funds and other big institutional groups from the U.S. and other major investing countries have given Europe a decisive vote of confidence. According to separate data from the German newspaper Handelsblatt and the British Office for National Statistics, foreign ownership of equities has risen to 55% in Germany and to 53% in the U.K., in each case a record level.
The buying surge represents a reaction to a marked fall-off of demand from the U.S. and Asia after the worsening European debt crisis in 2010-12. The fall in sentiment was partly reversed after the European Central Bank in summer 2012 outlined a conditional (and not yet implemented) plan to purchase bonds of hard-pressed euro members.
According to the Handelsblatt data, of the 30 highest capitalized German companies grouped in the Dax index /zigman2/quotes/210597999/delayed DX:DAX +0.46% , foreign ownership of these firms was a mere 36% in 2001 but has risen steadily since then. It was 52% in 2007 and 53% in 2011.
For 2013, when the overall figure is put at 55%, companies with the largest share of foreign owners are Deutsche Börse /zigman2/quotes/205502669/delayed DE:DB1 -0.75% , Adidas /zigman2/quotes/202556172/delayed DE:ADS +0.49% and Munich Re /zigman2/quotes/205537285/delayed DE:MUV2 -1.45% with 81%, 75% and 74.4% of shares held abroad. Bayer /zigman2/quotes/210533053/delayed DE:BAYN +0.33% is 71.6% owned by foreign investors, Allianz /zigman2/quotes/205544832/delayed DE:ALV -0.20% 69.7%, Linde /zigman2/quotes/203890251/delayed DE:LIN +1.64% 68%, Lanxess /zigman2/quotes/204947644/delayed DE:LXS +0.80% 66%, Daimler /zigman2/quotes/205332368/delayed DE:DAI +0.80% 65.8%, Kali & Salz /zigman2/quotes/205058230/delayed DE:SDF +2.70% 63.5%, Eon /zigman2/quotes/205877675/delayed DE:EOAN +0.79% 63%, Heidelberger Cement /zigman2/quotes/202418791/delayed DE:HEI +0.19% 57%, Fresenius Medical Care /zigman2/quotes/208962635/delayed DE:FME -0.07% 56.4%, Siemens /zigman2/quotes/200873563/delayed DE:SIE +0.81% 55%, Deutsche Bank /zigman2/quotes/205584254/delayed DE:DBK +0.50% 54% and Deutsche Post /zigman2/quotes/207090990/delayed DE:DPW +1.00% 52%.
For the U.K., longer-running data covering the total value of shares listed on the London Stock Exchange, excluding AIM, showed that, from below 10% in 1963, the proportion of U.K.-quoted shares owned by overseas investors rose to 31% before advancing to 53% at the end of 2012.
The British statistics office said: “The large increases partly reflect the growth in international mergers and acquisitions, and the ease of overseas residents to invest in U.K. shares.”
North American holders accounted for nearly half (48%) of the total £935 billion in holdings of U.K. shares owned outside Britain at the end of 2012. European holdings stood at 26%, while Asian holdings were 10%.