In a circular published last week, ABN Amro argued that European equities are likely to suffer as a result of “global de-leveraging”. Low American interest rates have made it easy for investors to borrow in dollars and invest the proceeds in European shares.However, rising interest rates in America mean the cost of such trades has become more expensive, so investors in Europe are likely to withdraw their cash. As a result the bank has shifted its stance on European equities to neutral from overweight. According to the ABN circular: “Cheap dollars have flooded the global financial markets and have inflated the price of risk assets. Now, the price of dollar refinancing is rising as the Fed keeps raising rates, while the reward from being long [on] risk assets has been gradually watered down over recent months.” Hedge funds and the proprietary trading desks of investment banks have played a key role in such trades. Rod Marsden, manager of the JO Hambro Continental European fund, says he disagrees with the report’s premise. Asset allocators have not moved that heavily into Europe, so there is limited scope for them to move out of it. “If it really was the case [that they had moved in heavily] I would have to agree European equities would not fare well in that environment,” says Marsden. However, he concedes that European smaller companies, which have performed particularly well since September, could be in for some volatility.