The prospect of a new Italian government forged from both the populist Five Star and League parties continued to cast a shadow over Europe Equity Funds going into the final week of May. EPFR-tracked Developed Markets Equity Funds did, however, post inflows overall as commitments to U.S. and Global Equity Funds narrowly offset redemptions from those with Japan and Europe mandates.
Europe Equity Funds saw another $2.5 billion flow out during the week ending May 23, extending their longest outflow streak since since a 38-week run ended in the fourth quarter of 2016. In addition to fears that the coalition government Giuseppe Conte has been invited to form will embroil the Eurozone in a fresh crisis, investors are responding to signs that the recent slowdown in Europe’s economic recovery may reflect more than a combination of one-off events, with a closely watched purchasing managers index for the region hittiing an 18-month low.
The political drama in Italy hit funds dedicated to that market hard. Italy Equity Funds saw over $380 million redeemed, eclipsing the previous outflow record set in mid-2014 when Italy was slipping into its third recession since the start of the Great Financial Crisis. The coalition government that is emerging has promised tax cuts, higher social spending and a roll-back of labor market and public pension reforms, measures that in combination seem certain to increase Italy’s fiscal deficit and bring it into direct confrontation with the Eurozone and the broader European Union.
Also experiencing significant outflows were Japan Equity Funds. Redemptions hit a five-week high as this fund group extended its longest run of outflows since late 3Q17. Investors used a recent rally that lifted key Japanese equity indexes to three-month highs to take profits amid signs that growth has stalled in the face of a less competitive yen for exporters, regional tensions, the threat of trade wars, reform fatigue and higher oil prices. Managers of Japan Equity Funds have been paring their exposure to IT and consumer discretionary places, with the latest allocations for these sectors at 14-month lows, while average weightings for healthcare, consumer staples and cash are at 18- and 24-month highs, respectively.
U.S. Equity Funds continue to benefit from a stellar first quarter earnings season and the accelerating pace of corporate share buybacks, attracting over $3 billion in fresh money despite the 47th consecutive week of net retail redemptions. Small Cap Blend Funds attracted the largest amount of fresh money and investors retained their strong preference for passive management and the lower fees that generally come with it. All of the ETF sub-groups recorded inflows while only Small and Large Cap Growth Funds did so among the actively managed sub-groups.