The pullback by European bears is becoming a disaster as equity traders trim down bets versus the region’s stocks by about $80 billion to the worst point in at least seven years. Borrowed shares of Euro Stoxx 50 Index firm, a sign of wagers versus equities, have fallen to 1.7 percent of the total outstanding from 3.2 percent two years ago and 24 percent at the height of the financial crisis, according to data from Markit, the London-based research company. Bullish bets on Europe have achieved the most since 2007 in a Bank of America Corp. survey of money managers who oversee $518 billion. Fed Stimulus The Euro Stoxx 50 rose 2.1 percent last week as the Federal Reserve unexpectedly refrained from cutting monetary stimulus. That brought the advance since equity markets bottomed in March 2009 to 62 percent, trailing the 153 percent surge in the Standard & Poor’s 500 Index and the 99 percent rally in the MSCI Asia-Pacific Index, data compiled by Bloomberg show. Emergency Aid Traders had $165 billion of European equities on loan in September 2011, as the region labored under the debt crisis that forced five nations to accept 496 billion euros ($672 billion) in emergency-aid pledges, Markit data show. Borrowing stock is the first step in a short sale, after which speculators sell the securities in the hope of replacing them at a lower price. Short Interest Markit’s data shows the percentage of shares on loan as of Sept. 13 is hovering just above the 1.5 percent reached Aug. 23. That was the lowest ever in data going back seven years and compares with an average of 5.1 percent over that period. ‘Stopped Deteriorating’ “There are a lot of reasons why you don’t want to be underweight Europe,” said Robin Thorn, who helps oversee $70 billion as head of equities at PineBridge Investments LLC in New York. “Things have stopped deteriorating. That doesn’t mean that things are great, but they have stopped getting worse.” Short Bans Countries from Spain to Belgium and Italy prohibited short selling during market retreats in recent years. While regulators have lifted the restrictions, traders are still required to report positions that exceed preset levels. Small Progress “Although it looks now as if the euro zone is not going to collapse, we see little signs of growth,” Lewis, who helps oversee $800 million in London, said in a phone interview on Sept. 18. “Despite the recovery in Europe, we don’t see as much upside there as we see in emerging markets and the U.S.” Investor Allocation ECB support may be helping attract investors. Thirty-six percent of respondents in a survey this month by Charlotte, North Carolina-based Bank of America said they hold more euro-area equities than are represented in global benchmarks, the highest level since May 2007, when the subprime-debt crisis began. A year ago, they reported the smallest allocations to the region relative to the rest of the world, the survey showed. Renault Borrow Loans of shares on Paris-based Renault, France’s second-largest carmaker, account for 0.92 percent, down from 2.25 percent in 2011 as the shares more than doubled, the data show. Stock on loan in Siemens AG, Europe’s largest engineering company, has declined to 0.78 percent of shares outstanding from 3.2 percent two years ago, Markit data show. Shares of Munich-based Siemens climbed 33 percent in that time. Euro-region stocks are cheaper than equities in the U.S. and Asia. After an 11 percent gain in 2013, the Euro Stoxx 50 trades at 13.1 times projected earnings, according to Bloomberg data. The S&P 500 is valued at 15.5 times estimated profit and Japan’s Topix trades at 15.1 times income after Prime Minister Shinzo Abe vowed to end two decades of deflation. Valuations in Europe will climb over the next 12 to 18 months amid rising appetite for risk, Anna Esposito, an equity strategist at Citigroup in London, wrote in a Sept. 16 report. She forecast that the Stoxx 600 will rise to 370 by the end of 2014, 18 percent above last week’s close. For Julio Sobremazas, the head of global equities at BBVA, the closing of short bets on European shares is a positive sign for the market. “What you have seen is all those underweight positions, and there were many, being closed and moving to neutral,” Sobremazas said in an interview. “We now need to see people committing money.”
