U.S. Stock Funds Are Left in the Cold as Even Europe Sees Inflow

(Bloomberg) -- The U.S. is now the only major equity region that investors continue to exit, as even unloved European stocks are seeing money return for the first time in months.

U.S. stock funds saw outflows of $700 million in the week through Feb. 6, bringing the year-to-date total redemption to $41 billion, according to a Bank of America Merrill Lynch note, which cited EPFR Global data. European equity funds had their first inflow in 22 weeks, with about $200 million coming in.

Japanese and emerging-market equity funds as well as investment-grade, high-yield and EM debt pools continued to see an influx of cash as traders embraced the best new-year rally in decades after a brutal fourth-quarter sell-off. Even after the S&P 500 Index’s 8 percent gain this year, many investors remain hesitant about U.S. equities amid concerns about elevated valuations and as earnings growth is projected to slow this year.

“Positioning, policy, profits and populism argue the correct early 2019 trading strategy is to ‘buy-the-dip,’” said Bank of America strategists, including Michael Hartnett, in the note. “Investors are back to discounting secular stagnation and buying yield and growth.”

Since the start of the year, traders have invested $36 billion into bonds and sold $10 billion of stocks, according to Bank of America. The 2019 rebound in U.S. equities has been curious because many traders lack conviction that the rally can last and prefer to stay on the sidelines, which has been reflected in lower trading volumes and price swings.

European equity funds were the pariah of 2018, seeing the biggest outflows among major geographic regions. Messy politics from Italy to the U.K. and earnings growth at a fraction of the pace seen in the U.S. made investors shun the region last year, but appealing valuations are making some fund managers take a second look at European stocks.

To contact the reporter on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon, Paul Jarvis

©2019 Bloomberg L.P.