Flows to U.S. and Europe equity funds continued to pull in opposite directions during the second week of June as investors evaluated both markets in light of current and anticipated monetary tightening by their respective central banks. Flows to U.S. equity funds hit a 13-week high as they extended their longest run of inflows since the aftermath of President Donald Trump’s election victory in 4Q16. Europe equity funds extended an outflow streak stretching back to the second week of March that has seen investors pull over $35 billion from this fund group.
While Italy’s uncertain journey to a new, populist coalition government has been a major driver of outflows in recent weeks, Italy equity funds recorded their biggest inflow since last October as members of the new government said the right things about membership in the Eurozone. The latest redemptions from Europe equity funds were tied to concerns that European Central Bank policymakers would strengthen the euro, and hence hit the competitiveness of Eurozone exporters, by spelling out the timing of the first interest rate hike in its current tightening cycle. The ECB duly announced it expects to wind down its quantitative program by the end of the year but doesn’t expect to start raising interest rates until the middle of next year.
The latest industry allocations show that Europe Equity Fund managers exposure to auto and banking stocks are at nine- and 19-month lows, respectively, while the average allocation for food, tobacco and beverage is at its lowest level since 3Q07. Healthcare’s weighting, meanwhile, is close to the six-year high it touched during the first quarter.
Flows into U.S. equity funds were the biggest since mid-March. But the longest run of inflows for this fund group since late 2016 has yet to rekindle retail enthusiasm. Large Cap Value Funds recorded the biggest inflows in cash terms, Small Cap Growth Funds in percent of AUM terms. Flows into all Small Cap Funds were the largest since late 2Q07. Actively managed Small Cap Growth Funds, the only subgroup where investors have been willing to pay active management fees so far this year (see chart below), posted their biggest weekly inflow on record.
Japan equity funds ended the second week of June with a modest net outflow. Foreign currency-denominated flows were negative for the ninth straight week and yen-denominated flows were essentially neutral. With “Abenomics” now in its sixth year and showing signs of fatigue, investors are increasingly unwilling to buy into Japan’s reform story and are waiting to see how the government reconciles a promise—in the name of fiscal responsibility—to raise the sales tax next year with slowing economic growth.