Investors have poured nearly $80bn into US equity funds since November’s election as optimism over the new administration’s pro-growth agenda received a boost after President Donald Trump addressed Congress this week.
Funds invested in US stocks counted $6.7bn of additions in the week to March 1, lifting flows since November 8 to $79.4bn, according to data from EPFR. The inflows have partially reversed a near constant exodus from the asset class that began at the start of 2015, that had at one point cumulatively drained $230bn from it.
The benchmark S&P 500 stock index has risen more than 10 per cent since the election. While investors lamented the lack of concrete policy detail in Mr Trump’s speech to Congress on Tuesday night, a verdict that he was more “presidential” managed to boost the S&P 500 on Wednesday to its biggest one-day gain since November 7.
“The combination of improving investor sentiment, accelerating global growth and hopes for stimulus . . . is driving the market to new highs,” said Savita Subramanian, an equity strategist with Bank of America Merrill Lynch. Ms Subramanian increased her S&P 500 year-end target this week to 2,450 from 2,300.
There has also been a shift in sentiment over whether the Federal Reserve will raise interest rates when it meets later this month. A series of hawkish comments from Fed officials, alongside strong economic data, pushed the market implied probability of a 0.25 per cent increase to 90 per cent on Thursday, from just 38 per cent a week ago.
“The drumbeat of Fed speakers and the slew of data that we saw has certainly laid out a very credible case for march,” said Eric Freedman, chief investment officer at US Bank Wealth Management, adding that the chance of the Fed realising its predicted three rises in 2017 is now “more likely than not”.
The inflows to US stock funds have been dominated by institutional investors and favoured exchange traded funds. Retail investors have pulled money from US stock funds for 14 consecutive weeks.
Outflows from western European equity funds more than tripled from a week earlier, to $1.5bn, while redemptions from emerging market stock portfolios accelerated to $331m, the data show. Russian stock funds, which have recorded inflows of more than $2.5bn since the election amid higher oil prices and improving investor sentiment, suffered their first withdrawals since November. The asset class counted outflows of $214m in the past week.
Meanwhile, flows into emerging market bond funds continued, with nearly $1bn added over the past week. There has been renewed appetite for emerging market stocks and bonds, but the potential for higher US interest rates and a stronger dollar continue to loom as risks.
The 2-year Treasury yield, which moves inversely to price, climbed to its highest close since 2009 on Thursday.
“Emerging markets are significantly driven by flows and policy. If the 2-year US Treasury sells off by 50 basis points we are not out of the woods,” said Eric Fine, a portfolio manager at VanEck.