The money kept flowing into three of the four biggest EPFR Global-tracked Developed Markets Equity Fund groups during the final week of February, with some investors chasing the U.S. stock market’s dizzying ascent, and some increasing their exposure to the global economy. U.S. Equity Funds absorbed fresh money for the third straight week, Global Equity Funds enjoyed record setting inflows and Japan Equity Funds took in nearly $750 million, more than offsetting redemptions from Europe Equity Funds that were the biggest in 13 weeks.
U.S. Equity Funds flows, while solid, continue to lag the stock market’s latest surge, which carried the benchmark Dow Jones Industrial Average index over the 21,000-point mark. Some investors were waiting for President Donald Trump’s speech to Congress on Feb. 28 for clues about economic and tax policy before moving. Others are uncomfortable with current valuations, and in the opinion of Informa Financial Intelligence’s chief macro strategist, David Ader, are right to be so.
In a recent note Ader observed that, “my favorite contrarian measure for U.S. equities is the Daily Sentiment Index (DSI). I look at this across a lot of futures and when it flashes a warning, I listen. The current DSI for the S&P 500, based on a five-day moving average, is over 89 and I deem anything over 80 to be in overbought territory….at 89.2, the current DSIs are, in a word, extreme. The last time they were this high was in February 10 – 21, 2011. Three weeks later the S&P 500 fell around 6%.”
While U.S. stocks may be overbought, Europe stocks remain a hard sell to investors outside the continent despite evidence that a modest recovery in the Eurozone is picking up steam. Retail redemptions from Europe Equity Funds hit their highest level since early November as investors brace for a series of general elections, starting with the Netherlands in two weeks, that could see populist, euro-skeptical parties gain further ground. At the country level, a market highlighted by Trump led the way when it came to attracting fresh money, with flows into Sweden Equity Funds hitting a two-month high as economic growth in the Scandinavian nation continues to accelerate. France Equity Funds, meanwhile, saw redemptions jump to a 21-week high.
Japan Equity Funds recorded solid inflows during a week when the yen’s strength, or lack of it, versus the U.S. dollar was a key driver of the domestic equity market. The latest shift in expectations for the next U.S. rate hike has bolstered the case for Japanese export plays, which have benefited in recent months from the more competitive yen.
The largest of the diversified Developed Markets Equity Fund groups, Global Equity Funds, continued their strong run with the biggest weekly inflow on record in cash terms and since mid-4Q15 in % of AUM terms.
Cameron Brandt is Director of Research for EPFR Global, an Informa Financial Intelligence company.