More than $5.1bn flow into US stock funds

Posted on November 25, 2016

US stock funds continue to pull in investor’s cash after the US election, as Donald Trump’s rhetoric over renewed growth for the economy shows no sign of abating.

Just over $5.1bn flowed into US stock funds for the week ending November 23, according to data from EPFR. It was a lighter intake than the previous record-setting week, but still accentuated the rotation out of bond funds and into equity funds that has characterised investor flows since Mr Trump’s election victory on November 8.

Globally, bond funds lost $8.6bn, with $2.5 coming out of the US, as bond yields, which move inversely to price, have risen sharply since November 8. Emerging market bond and equity funds also continued to shed money, with investors pulling $2.9bn and $1.9bn from funds, respectively.

In contrast, investors have renewed vigour for US equities after the US election due to Mr Trump’s message of instigating growth through infrastructure spending and tax cuts.

This week all four major equity benchmarks hit new highs — the previous time this grand slam occurred was in 1999. The US dollar has also risen, bolstering smaller companies’ stock prices as they tend to be more domestically focused and therefore more protected from currency fluctuations.

Rising bond yields and potential trade negotiations could also present future headwinds for larger companies. “If trade and the dollar become an issue small caps are more insulated and should be able to maintain earnings,” said David Lebovitz, global market strategist at JPMorgan Asset Management.

Still, much of the rise is based on expectations ahead of the new administration taking control, and some investors are wary of the possibility that the market has shifted too far.

“What you are seeing markets price in right now, at least in equity markets, is Donald Trump goes on and bowls a 300,” said Mr Lebovitz. “I would be willing to say it probably won’t work out that well — he is not going to bowl a perfect score. There is an opportunity for some pullback or consolidation. It does feel like markets have run pretty far, pretty fast, on speculation.”

In Europe, the prospect of disruption from elections next year, notably in France and Germany, along with the upcoming Italian referendum on constitutional reform is prompting uncertainty, according to Jim Sarni, managing principal at Payden & Rygel Investment Management.

European bond funds alone saw outflows of $3.5bn, the largest since June 2015.

“It’s clear that the unexpected is happening with greater frequency!” said Mr Sarni. “The market does not like uncertainty and there’s just a bit of that in Europe right now!”

In addition, foreign investors have been attracted to US bond markets as yields have risen faster than comparable European markets. Strong demand at this week’s auction of 7-year Treasuries on Wednesday hinted at foreign demand, according to BMO analysts, after weaker 2-year and 5-year auctions on Monday and Tuesday.

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