US stock funds record biggest outflows in more than 18 months
Shift toward Europe accelerates amid doubts over Trump’s policy agenda
US stock funds experienced their largest withdrawals in more than 18 months and investors extended their rotation into cheaper valued European equities according to the latest weekly flow data from EPFR.
Investors drained $14.5bn from US stock portfolios in the week to April 5, and a shift out of US equities has accelerated since the Trump administration failed to push healthcare reform through Congress. This week, Paul Ryan, the speaker of the US House Representatives said tax reform would take time to accomplish given differences between Congress and the White House.
With investors yet to see progress on the Trump administration’s plan to pass corporate tax cuts that have been central to a rally in the benchmark S&P 500 and Russell 2000 index of small companies, net assets across mutual and exchange traded funds in US stocks have fallen by $84bn from a record high set in March.
“President Donald Trump’s administration is still trying to get its bearings and struggling to advance its reflationary economic agenda,” said Cameron Brandt, the director of research at EPFR.
“The perception that Trump’s promises will take some time to materialise — if at all — prompted investors to . . . look for alternatives to US equities,” he added.
US small capitalisation stocks, seen as greater beneficiaries of tax cuts than their large-cap peers, recorded redemptions of $2.7bn in the past week, the largest weekly withdrawal since late 2015.
As doubts over US policy weigh on Wall Street, investors have embraced the growth prospects in Europe as well as the lower stock valuations across the continent, looking past risks posed by the French elections and Brexit. Funds invested in western European stocks enjoyed their largest two-week inflow in more than a year, with $876m of fresh capital added in the last week.
"We are tracking big flows out of the US into foreign markets. It is propping them up,” said Paul Christopher, a strategist at Wells Fargo Investment Institute. “There is a real perceptible improvement in the economic situation in Europe, alongside the European Central Bank’s decision to taper, and that is drawing in investors."
European bond funds also notched their largest additions in 13 weeks, with $905m of inflows during the period. Data this week showed eurozone unemployment has fallen to its lowest level in eight years, while surveys of manufacturing activity have improved.
European stocks have outperformed their US counterparts over the past month, with the FTSE Eurofirst 300 advancing 1 per cent versus a 1.3 per cent decline by the S&P 500. Spain’s Ibex 35 has climbed 7 per cent over the period while Italy’s FTSE MIB is up more than 4 per cent.
Guy LeBas, chief fixed-income strategist at Janney Capital Management, added: "There is a running joke that it is impossible to find a euro equity bear right now. And it’s true.”
Overall, investors committed more than $12bn to global bond funds and redeemed $7.4bn from global stock funds — including the large withdrawals from the US. Inflows to haven money market portfolios totalled $14.5bn.
While US stock markets have lost momentum amid the political wrangling, the reflation trade remains buoyant abroad. Roughly $2.4bn poured into emerging market equity funds, helping lift inflows since the start of the year to $13bn and pushing the MSCI emerging markets index up 3 per cent over the past month. Emerging market bond funds counted their tenth consecutive week of inflows, taking in a further $2bn.
Dirk Willer, an emerging markets strategist with Citi, said that despite broad economic activity losing some momentum, recent activity data remain healthy.
“There is nothing to suggest as yet that the emerging market business cycle recovery is threatened,” he said. “We also take comfort that low US Treasury yields and a soft dollar would offer some buffer to emerging markets from a brief equity or commodity market correction.”