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Chart 1: The euro area has purchased US securities on a massive scale since the second quarter of 2020
Source: European Central Bank.
Note:
Quarterly net portfolio investment flows (equity and debt securities)
of euro area residents, EUR billion. A positive (negative) number
implies net purchases (sales) of foreign securities by euro area
residents.
The shock of the pandemic in March 2020 led euro area residents to unwind their investments in foreign securities, with net sales reaching EUR 134 billion in the first quarter of 2020. This is the highest amount of sales since the great financial crisis, which saw EUR 165 billion of net sales in the third quarter of 2008.
From a geographical perspective, these sales mainly concerned securities issued in Japan, the United Kingdom and the United States. These countries accounted for 25%, 18% and 17%, respectively, of total net sales in the first quarter of 2020. Sales of Japanese securities (EUR -25.3 billion) were mainly made up of equities, while sales of US securities (EUR -24.0 billion) were essentially composed of debt securities. Comparing the amounts sold with the euro area’s total holdings vis-à-vis these countries, it appears that the euro area sold 7% of its stock of Japanese securities, compared with 0.6% for US securities.
The onset of the coronavirus crisis led to a repatriation of funds through the sale of foreign securities, consistent with a preference for domestic securities (home bias) generally observed during crises. Indeed, the repatriation of funds in times of crisis may be motivated by informational advantages, a better relative status of domestic investors in case of default or the need to reduce exchange rate risks. These dynamics went along with strong selling pressures on international capital markets as well as a reduction in leveraged investment positions.
Central bank interventions resulted in an abundance of liquidity which may have affected euro area residents’ investments. Following the sales recorded in the first quarter of 2020 and as markets recovered, euro area investors invested abroad again in the second and fourth quarters of 2020, setting new records for purchases, at EUR 383 and 342 billion respectively. Overall, outflows from the euro area amounted to EUR 685 billion in 2020, compared with EUR 442 billion in 2019.
During 2020, euro area residents’ investment in foreign stock markets showed a dramatic increase. Non-resident equity purchases by domestic investors reached EUR 288 billion, which is a record. The share of equities in euro area outflows thus stood at 42% in 2020, compared with an average of 22% between 2017 and 2019. In terms of the relative share of the euro area securities portfolio, the weight of foreign equity rose in 2020. Euro area residents invested EUR 207 billion in US equities in 2020 (72% of the total), compared with only EUR 50 billion in 2019. This can be explained in particular by the speed of the recovery in US markets in 2020 (Carvalho and Schmitz, 2021).
Chart 2: Euro area purchases of non-resident equities in 2020
Source: European Central Bank.
Note:
Portfolio investment flows, equities, in EUR billion. A positive
(negative) figure means net purchases (sales) of equities by euro area
residents.
The purchase of foreign equities is
in line with the optimism that characterised financial markets at the
end of 2020. The announcement of the discovery of vaccines, the recovery
in commodity prices, the election of J. Biden in the United States and
the free trade agreement between the United Kingdom and the European
Union contributed to the rise of stock prices. This optimism was also
underpinned by central banks’ commitment to keep interest rates at low
levels. In search for yield, investors also increased their equity
positions in emerging markets.
Looking at euro area liabilities, i.e. the flows of purchases or sales of resident securities by non-residents, foreign investors considerably upped their purchases of short-term debt in 2020, especially government debt, which reached the historical highs observed in 2008. In contrast, net purchases of euro area equities by non-residents reached, on average, the lowest point in the decade after 2011 (EUR 8 billion) , notably due to the shock in March 2020, during which sales of euro area equities reached EUR 134 billion.....
Chart 3: Record purchases by non-residents of euro area short-term public and private debt in 2020
Source: European Central Bank.
Note: Euro area debt securities purchases (positive) and sales (negative) by non-residents, 12-month rolling sum, EUR billion.
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About the authors
Julia Schmidt is working as a research economist at the Banque de France’s International Macroeconomics Division since September 2013. Her research concerns international macroeconomics, among others international banking, capital flows and their link with monetary policy, as well as the role of standardization for business cycles, innovation and international trade. Julia received her PhD in 2013 from the Graduate Institute (IHEID) Geneva.
Olivier Sirello is an economist-statistician at the Balance of Payments Division of the Banque de France. He holds two Master’s degrees in Economics and Public Policy from Sciences Po Paris and Bocconi University and is a former student at Princeton University. He also teaches economics at Sciences Po Paris. His research interests cover cross-border capital flows, portfolio rebalancing and large-scale asset purchases.