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Fund flows into European stocks have surged in recent months, data showed, as global investors look to diversify away from U.S. equities amid concerns over higher valuations and caution ahead of the presidential elections.

Data from Morningstar showed fund inflows into European equities stood at $57 billion in the third quarter, compared with an outflow of $135 billion from U.S. stocks.

U.S. equities have rallied this year, fuelled by a surge in technology stocks and economic stimulus measures, while European shares have lagged behind.

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That underperformance could now bolster European shares, with investors looking for cheaper, quality stocks outside the United States, analysts said.

“The outcome of U.S. elections could have dramatic and broad reaching impacts, the magnitude of which is unclear. With that in mind, it stands to reason that investors could see Europe as a more favorable destination for their risk assets,” said Jared Leonard, investment specialist at Hartford Funds.

“For investors thinking those strong performing U.S. stocks could be in bubble territory, that is just another reason to reallocate risk to European equities,” he added.

Investors are wary about the possibility of U.S. President Donald Trump disputing the election result if he loses, which could lead to market turbulence. Trump is lagging Democrat Joe Biden in his re-election bid, according to opinion polls.

According to Refinitiv data, the forward 12-month price-to-earnings ratio of U.S. equities is 23.6 times, much higher than Europe’s 17.3. European equities also offer a higher dividend yield of 2.6%, versus the United States' 1.5%, the data show.

“The weak dollar and rising euro have boosted the returns of European assets for foreign investors,” said Vincent Deluard, global macro strategist at StoneX Group.

“European valuations are much cheaper than in the U.S., and I would argue that European companies have similar or better prospects than U.S. stocks (excluding FAANMG, which are in a league of their own),” he added, referring to top performing U.S. tech stocks: Facebook, Amazon.com, Apple, Netflix, Microsoft and Google-owner Alphabet.

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The optimism over European stocks may, however, be hampered by a second wave of the coronavirus outbreak, with Germany, France, Britain and others announcing preventive measures, including curfews and limits on private gatherings.

But some analysts said the impact on the region’s economy would be limited this time.

“As Europe and the UK continue battling the second wave of COVID-19, we don’t expect new widespread and prolonged lockdowns,” said Citi in a report.

“There are likely further (stimulus) measures to come from both governments and central banks.”

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