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US stock funds record largest outflows since Brexit

US stock funds suffered their largest redemptions since the Brexit vote in June as Donald Trump’s push to reform healthcare floundered ahead of an expected vote in Congress in the biggest test yet of his young presidency.

The quarrel among Republicans over the politically charged healthcare legislation has increased market volatility and flamed investor fears that the US president may struggle to pass tax reforms later this year, a key pillar of the S&P 500’s rally since the election.

Funds invested in US stocks recorded $9bn of withdrawals in the week to March 22, the largest weekly redemption since last June, according to fund flows tracked by EPFR. The outflows reduced the additions to the asset class since the election to roughly $90bn.

The S&P 500 slid for the fifth time in the past six days on Thursday after Republicans delayed a vote to repeal and replace the Obama-era healthcare law, in a blow to Mr Trump. Strategists with Morgan Stanley warned that the postponement signalled “a bolder stance for fiscal hawks, which may limit the potential for tax reform to meet market-friendly goals”.

“Now that we have a little more of a headwind on the political front as opposed to the tailwind that has been pushing us, it makes sense people are taking money off the table,” said Jim Tierney, chief investment officer of concentrated US growth at AllianceBernstein.

“Healthcare reform was the most prominent issue and if [Republicans] can’t succeed here how can they succeed anywhere else?” he added. “But the flip side is that if President Trump is a pragmatist, does he switch to something he can rally more consensus around?”

US stocks have pared gains from the start of the year, with the S&P 500 down 2.3 per cent from a high hit on March 1. Reflecting the renewed political scepticism, the Russell 2000 index of small-capitalisation stocks — which are seen as a bet on the domestic economy because of their small international presence — has lagged behind the S&P 500 and is down 4.3 per cent since the start of the month.

Investors have instead shifted into more defensive sectors of the market, with funds buying utilities enjoying their first back-to-back week of inflows since the third quarter of 2016. Utilities are the best performing industry within the S&P 500 since the start of February, advancing 6.9 per cent to the wider market’s 2.9 per cent gain. Flows into haven gold funds hit a five-week high, while emerging market bond funds enjoyed the largest new allocations since July 2016, the EPFR data showed.

Money managers were attuned to recent weakness in high-yield corporate bonds, with several companies trying to issue new debt forced to pay up to complete their sales.

Oil services group KCA Deutag ultimately paid a yield of 10.25 per cent to issue a five-year note that matures in 2022, well above the initial mid-8 per cent yield circulated to investors during marketing roadshows. Meanwhile BWAY Holding, which borrowed money to fund its takeover of packaging products supplier Mauser, raised $1.48bn of new debt at a yield above the 5.375 per cent price talk.

New bond sales have also thinned in the run-up to the expected vote on healthcare in the House of Representatives. Thursday was only the second time this year that no investment grade-rated company issued debt in the US, according to Dealogic data. Debt sales also ceased on the day of the Federal Reserve’s February 1 decision. Fund managers and bankers said there were a handful of companies that decided to wait for a dip in volatility before tapping markets, delaying their bond sales on Wednesday and Thursday.

“You would not want the high-yield market to catch a cold if you’re an equity investor,” Mr Tierney said.

Junk bond funds, which recorded their largest outflows since December 2014 in the prior week, were hit with $1.4bn of further withdrawals in the week to March 22, including nearly $1bn from US-focused portfolios. Redemptions accelerated as the week progressed, with the vast majority drawn on Wednesday.

The premium investors demand to own high-yield debt has climbed as the broader market has lost some momentum. The so-called spread on US high-yield bonds has increased 56 basis points from a low earlier this month, according to Bank of America Merrill Lynch.

Strategists with the bank said that they believed the sell-off was “a blip”, but cautioned it could be “the late spring sell-off” they had envisioned earlier this year.

Other investors said they were hoping to buy into the dip after a strong start to the year. Jennifer Vail, head of fixed income research at US Bank Wealth Management, said she did not yet believe that the declines marked a “turning point” for credit, pointing to the oil price drop for some of the weakness in high-yield markets.

“Demand for credit is going to remain solid,” she said. “Yields on Treasuries are still not at levels where they compensate investors for tying up their money. The hunt for yield remains.”

Additional reporting by Joe Rennison

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