Investors shun European equity funds ahead of Italy vote

Investors poured money into US equity funds and pulled it from European ones in a week dominated by hopes for an acceleration in US economic growth and anxiety over Italy’s referendum on constitutional reform this weekend.

European equity funds lost $2bn in the week to November 30, according to data from EPFR, while US funds attracted $4.4bn. That takes the total inflow for US equity funds since Donald Trump’s US presidential victory early last month to $40bn.

The US president-elect’s pledge to fuel US growth through a mixture of tax cuts and infrastructure spending has sent the dollar to a 13-year high against a basket of rival currencies and hammered the sovereign bond market.

European bond funds lost $1.9bn for the week ending November 30, the fourth straight week in which investors have exited. They have now lost about $8bn since the US election.

“The strength of the dollar really is driven by incremental hope and confidence in continued growth in the US economy, which seems to be leaving the European recovery in its wake,” said Nicholas Colas, chief market strategist at Convergex. 

However, interest in US stocks has not been indiscriminate. A sector rotation is under way favouring areas that are seen benefiting from Mr Trump’s policies and a rise in interest rates. Financials have rallied 14 per cent since the election, including 2 per cent over five trading sessions.

On top of the rise in the US dollar, a vote against a constitutional referendum in Italy on Sunday could spark turmoil for Italy’s troubled banks. Italian equity funds experienced modest outflows of $2.5m, the third straight week of investors pulling cash totalling $100m. 

“There has been persistent worry about the European financial system and Italian banks. [The referendum] puts a spotlight on it,” said Mr Colas. “That is 20-30 per cent of [the outflow], the bigger part is currency.”

But some analysts believe the dollar could change direction in the new year as inflation rebounds and the Federal Reserve looks to raise interest rates.

“One of the strongest consensus trades is that the dollar will go north,” said Jim Paulsen, chief investment strategist at Wells Capital Management. “I think that is wrong . . . I don’t think people are looking at the reason rates are rising. It’s inflation and inflation is destructive for the US dollar.”

Elsewhere, US high-yield funds had inflows of $1.2bn, bucking the trend against global bond fund and US investment-grade peers, which lost $4.4bn and $1.1bn respectively. 

Lower-quality corporate debt is more insulated from a rise in interest rates because of its higher yield being predicated more on the credit quality of junk-rated companies, which is benefiting from higher growth expectations in a manner more akin to US equities.