Investors with a developed market focus added—albeit narrowly—to U.S. Equity Funds' longest winning run since the fourth quarter of 2017 during early June as the country's economy responded to President Donald Trump's tax cuts, and fiscally expansive policies that are expected to push the budget deficit over $1 trillion annually by 2020. They also extended Europe Equity Funds' longest outflow streak since the second half of 2016 as markets fretted about the tax cutting, expansionary agenda promised by Italy's new coalition government.
The new Italian government, based on the country's two largest populist parties, took office in early June and survived its first confidence vote. It will—if it holds together that long—present its first budget for review by the European Union in the third quarter. Investors continue to vote with their feet, pulling over $4 billion out of all Europe Equity Funds and removing money from Italy Equity Funds for the 21st time in the 23 weeks year-to-date. Slowing growth, the unresolved issues dogging the UK's departure from the European Union and the election of a populist government in Slovenia are also weighing on these funds.
While Italy has dominated the headlines, investors have also been cutting their exposure to other European and Emerging European markets. During the first week of June they redeemed a record-setting sum from Austria Equity Funds, pulled money out of France Equity Funds for the seventh straight week despite that country's reform story and hit Switzerland Equity Funds with their biggest collective outflow since late 2016.
Sentiment towards US Equity Funds was underpinned by the recent surge in the value of share buybacks, indications that the US economy is growing at an annualized rate of over 3.5% during the current quarter and the strong numbers posted during the early 2018 corporate earnings season. But retail redemptions, which fell to a 48-week low in late May, picked up steam again.
Flows into Japan Equity Funds rebounded sharply, hitting a seven-week high, as oil prices moderated, the yen regained some of its competitiveness versus the US dollar and charges were dropped in a land-use corruption scandal that has sapped Prime Minister Shinzo Abe's political capital in recent months.
The largest of the diversified Developed Markets Equity Fund groups, Global Equity Funds, saw their year-to-date inflow tally move within striking distance of the $90 billion mark. At the same point last year, which saw this fund group set a new full-year inflow record, they had absorbed $60 billion. Overall flows continue to favor funds with ex-US mandates, but to a lesser degree than was the case in 2017.
Cameron Brandt is Director of Research for EPFR Global, an Informa Financial Intelligence company.