LONDON (Dominic Lau) - 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 euro zone debt crisis spooked investors.
The sharp falls, which wiped more than $750 billion 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 euro zone sovereign debt crisis, fears the United Statescould 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 U.S. 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 favor of cash," he said.
The latest Reuters monthly asset allocation poll showed cash holdings in Europe leapt to 10.4 percent in August from 6.8 percent 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 percent this month, its biggest monthly percentage drop since October 2008 after the collapse of investment bank Lehman Brothers.
The benchmark has fallen 14 percent so far in 2011, far outstripping a 2.7 percent drop in the U.S. S&P 500 index.
"European stocks have been seriously underperforming U.S. shares this year, with a risk premium linked to the region's debt trouble, but also as if a U.S. 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 $178 billion under management.
Germany's DAX index, which outperformed other major European markets in the first seven months of the year, was down 19 percent 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 percent 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 U.S. economy have stabilized 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 percent for theMSCI world index between 1971 and 2010. December, by contrast, has seen the biggest gains, with stocks rising 2.2 percent on average.
(Additional reporting by Natsuko Waki and Luke Jeffs in London, Blaise Robinson in Paris,; graphics by Scott Barber and Vincent Flasseur; editing by Nigel Stephenson)
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