Investors sit out European rally Trading in European stocks hit a fresh 12-year low as cautious investors continued to watch developments in the eurozone from the sidelines rather than buying into the recent rally. The rolling 200-day moving average of trading volumes on the FTSE Eurofirst 300 blue-chip index fell to 1.8bn shares a day this week, the lowest level since June 2001, and half the peak level of 3.5bn shares a day over the same period. Volumes continued to fall even as European stocks raced towards five-year highs. The FTSE Eurofirst 300 has gained more than 30 per cent since a trough in June last year. Undoubtedly volumes are incredibly low. Large investors haven't bought into the rally," said Robert Machell, partner at Governance for Owners, an activist investment fund. European equity volumes have fallen sharply over the past few years as hedge funds and other short-term investors retreated from the region, institutional investors reallocated out of Europe, and regulations restricting short selling helped to drain liquidity from the market. The region came back into focus at the beginning of the year as investors poured billions into equities globally, the most in half a decade. Flows into Europe, while more modest than US equity inflows, looked promising and strategists talked about a "great rotation" out of fixed income and into equities. But political uncertainty in Italy, as well as new sovereign debt concerns in Cyprus and Portugal, have since stemmed much of the inflows. Institutional investors have changed their positions in European equities from "underweight" to "neutral" and have sold some of their fixed-income positions but remain wary of taking bolder steps. "Volumes are not picking up because of many factors, one of which being that institutions in Europe are less active," said Patrick George, global head of equities at HSBC. What we've seen is that pension funds and insurance companies have slowed down selling equities but the big rotation in Europe has not happened yet. Tougher regulation on banks" proprietary trading and the introduction of a financial transaction tax in Italy have also helped to put a downward pressure on trading volumes. Eleven members of the EU are discussing plans to introduce a tax on financial transactions as soon as January of next year. The EU estimates the tax could rake in €30bn-€35bn a year. In March, Italian regulators implemented a tax on securities trading on the Milan exchange, sending volumes down sharply over the first few weeks. "What we have seen at the margin is some inflows into equities over the last three to six months but from levels where you had an extended period of outflows," said Paras Anand, head of pan-European equities at Fidelity Investments.