The shift — which follows a torrid 2016 when investors pulled roughly $100bn from the asset class — has been driven by hopes of a synchronised global economic expansion accelerating.
European stock fund managers received $1.5bn in the week to March 29, the largest weekly addition in more than a year, according to fund flows tracked by EPFR. Inflows to emerging market stock funds, which have rebounded strongly as commodity prices have risen, eclipsed $10bn for the year in the week to March 29.
In contrast, US stock funds suffered a second consecutive week of outflows as investors express concern over high valuations and whether the Trump administration can reach agreement with Congress over tax reform and fiscal spending plans.
“We have seen a broadening out of global growth and that upside risk has manifested itself in Europe and emerging markets,” said Ben Mandel, a strategist with JPMorgan Asset Management. “If the US is your high quality defensive market and you see some allocation away from that, it is a sign people are less concerned about downside risk and need less ballast in their portfolios.”
European share prices have outperformed the broad US market since the start of January, with the Eurofirst 300 up 6.4 per cent in US dollar terms and Spain’s Ibex advancing 12.6 per cent and Italy’s FTSE MIB up 7.4 per cent. The S&P 500 has gained 5.8 per cent for the year.
EPFR said at the single country and asset class levels, flows into Germany and Italy Equity Funds hit 66- and 72-week highs respectively in late March. Italy equity funds recorded their largest inflow since the fourth quarter of 2015.
Strengthening economic data — including improving manufacturing and consumer sentiment, a six-year high in eurozone purchasing manager indices and easier global financial conditions — have renewed investor confidence in the global outlook and ability for markets to absorb shocks.
“When you look at the data coming out of Europe continuing to improve, fear subsiding . . . it definitely looks like there are opportunities brewing internationally,” said Jeff Carbone, managing partner and founding member at Cornerstone Financial Partners.
Inflows to Europe have been dominated by institutional investors, who have added more than $9bn to eurozone funds this year. Retail investors have offset much of that, redeeming $7bn from the asset class.
“In the US expectations were too rosy and markets needed to re-price that and in Europe expectations were too gloomy and markets needed to reprice that,” said David Schiegoleit, a managing director at US Bank Wealth Management.
The shift into Europe is still nascent, with outflows last year driven by worries over political risk and Italian banks posing a systemic risk to the eurozone financial system.
However, investor sentiment has benefited from recent French election polls that have given the edge to independent centrist Emmanuel Macron over Marine Le Pen, the far-right National Front candidate. That has also helped push market measures of volatility in European stock markets back towards the lows of the year.
That prospect of an acceleration in growth has buoyed emerging market stocks and bonds, with MSCI’s emerging market index up more than 12 per cent for the year.
Japan equity funds finished the first quarter on a solid note, attracting another inflow in excess of $2bn said EPFR. However, both the Nikkei 225 and Topix benchmarks ended the first quarter in negative territory for the year as a firmer yen has pressured exporters.
Faster growth technology stocks in the US have also benefited, outpacing all other sectors in the S&P 500 in 2017.
While the S&P 500 remains higher for the year and US stock inflows are still substantially positive since the election, signs have emerged of some investor pull back. Small-capitalisation stock funds, which tend to be more closely affected by US growth than their large-cap peers, recorded only their third weekly outflow of the year in the week to March 29.
EPFR said: “There was no let-up in the rotation from active management to ETFs: among actively managed sub-groups, only mid-cap value funds attracted any fresh money.”