Investors’ positions fluctuated wildly this year after unexpected election results in the UK and US upended markets, ultimately propelling a global stock rally and selling of government bonds as portfolio managers readied for the arrival of fiscal stimulus and inflation.
A $66bn rotation into US stocks over the past eight weeks reflects expectations for faster global growth and inflation in the wake of Donald Trump’s surprise US election win. Investors have poured money back into stocks and staunched the near-constant outflows from European equities since the US election.
“Fiscal stimulus is going to play a bigger role,” said James Sarni, managing principal of Payden & Rygel Investment Management. “There is a much more constructive outlook as far as the markets are concerned and there has been a change in perception and mentality.”
A more hawkish Federal Reserve and the looming reduction of asset purchases by the European Central Bank have also combined to knock bond funds.
Roughly $39bn has been redeemed from global bond funds since the start of November, paring the asset class’s haul for the year to $148bn from an inflow of as much as $186bn at the end of October, according to fund flows tracked by EPFR.
Much of that money has found its way into US equities, with the benchmark S&P 500 touching a record high earlier this month and the blue-chip Dow Jones Industrial Average charging within 20 points of the 20,000 threshold on Tuesday.
Tax cuts and reduced regulatory burdens are “critical” to further stock gains, said Brian Jacobsen, chief portfolio strategist at Wells Fargo Funds.
“The [stock market] gains are predicated on tax cuts and regulatory relief,” he said. “If Mr Trump stumbles on that, that would set us up for a rather quick correction.”
Flows out of European equities have only recently stabilised, by contrast. Nearly $100bn has been pulled from funds investing in continental stocks this year, in a near-constant deterioration aggravated by the UK’s Brexit vote, Italian banking crisis and the country’s referendum. For 38 straight weeks between February and October, European stock funds counted withdrawals.
Flows into emerging markets have also whipsawed this year, as investors, grappling with nearly $14tn of debt trading in negative territory, sought out higher yielding securities. Emerging market bond funds enjoyed $23bn of fresh capital this year, although outflows have dogged the sector over the past eight weeks. EM stock funds have suffered redemptions of about $2bn this year, reversing inflows of as much as $12bn before the election.