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London - European shares suffered their biggest monthly loss
in August since Lehman Brothers collapsed in 2008, with German stocks posting
their worst drop in nine years, as worries over slowing growth and the eurozone
debt crisis spooked investors.
The sharp falls, which wiped more than $750bn off share
values, came in high volumes. Trading turnover in August, which is usually low
with many fund managers and traders on holiday, was the highest in almost three
years.
The sell-off was sparked by an escalation in the eurozone
sovereign debt crisis, fears the United States could be heading for a recession
and the loss of the world’s biggest economy’s triple-A debt rating.
In response, investors sought shelter in safe-haven assets
such as gold and US and German government bonds or even just cash.
"This month’s performance has been very bad, on the back of
a mix of fundamental elements coming in such a short span that the effect on
the market was devastating," Franklin Pichard, director at Barclays France,
said.
"Political cacophony on both sides of the Atlantic, credit
downgrades, doubts about banks’ balance sheets, fears of a repeat of the credit
crunch of 2008... coupled with a number of profit warnings. All this has
prompted investors to cut their weighting on equities, in favour of cash," he
said.
The latest Reuters monthly asset allocation poll showed cash
holdings in Europe leapt to 10.4% in August from 6.8% last month , while asset
managers sharply cut equity holdings.
"Economic growth is slowing down, with scant hopes of
regaining strength any time soon, as governments in developed countries push
for budget austerity," said Giordano Lombardo, Group chief investment officer
at Pioneer Investments.
"Most of Europe feels the heat of the sovereign debt
crisis... We believe volatility will settle down somewhat, otherwise our asset
allocation will cut risky assets."
The pan-European FTSEurofirst 300 index of leading European
shares lost 11% this month, its biggest monthly percentage drop since October
2008 after the collapse of investment bank Lehman Brothers.
The benchmark has fallen 14% so far in 2011, far
outstripping a 2.7% drop in the US S&P 500 index.
Underperformance
"European stocks have been seriously underperforming US
shares this year, with a risk premium linked to the region's debt trouble, but
also as if a US recession had been priced in here but not on Wall Street," said
Catherine Garrigues, senior equity portfolio manager at Allianz GI Investments
Europe, which has around $178bn under management.
Germany’s DAX index, which outperformed other major European markets in the first seven months of the year, was down 19% in August, its worst monthly fall since September 2002, as investors reassessed the impact of slowing global growth on German exporters.
That compared with an 11% fall in
France's CAC 40 .
Some dealers ascribed part of the underperformance of the
German blue chip index to a ban on short selling of financial stocks introduced
by France, Spain, Italy and Belgium on August 12. Investors use the DAX and DAX
derivatives as proxies to bet on falls in the broader European market.
However, expectations that the Federal Reserve may step in
next month with another stimulus package to boost the US economy have
stabilised markets and may help stop the outflow from equities.
September tends to be weakest month for equities, with an
average monthly drop of 0.7% for the MSCI world index between 1971 and 2010.
December, by contrast, has seen the biggest gains, with stocks rising 2.2% on
average.
