US equity funds see largest outflows since Trump win

Investor optimism faded in the week preceding the inauguration of Donald Trump as US president, with equity funds suffering their largest outflows since the surprise result of November’s election.

Close to $2.5bn fled US equity funds in the week ending Wednesday, according to data from EPFR Global, extending outflows of $250m from the prior week and demonstrating that the investor demand that drove more than $60bn of fresh cash to the funds late last year has fizzled out.

Investors’ appetite for US stocks had been predicated on expectations of renewed growth under the new administration, cementing earlier signs of stronger economic data that preceded the election. But a lack of clarity on key growth policies, such as tax cuts and fiscal expansion, has taken the wind out of the rally’s sails.

“Markets continue to pull back, albeit slowly, as traders and investors alike, attempt to discern what’s just ‘tweet talk’ versus actual policy initiatives,” said Quincy Krosby, market strategist at Prudential Financial.

The S&P 500 was down slightly over the past two weeks compared with a 4.6 per cent gain from the election on November 8 to the end of 2016. The yield, which moves inversely to price, on the benchmark 10-year Treasury sits at 2.47 per cent, up from 1.85 per cent on November 8, but down from a high of 2.64 per cent reached in mid-December.

As the so-called Trump trade has cooled, some big beneficiaries have seen a reversal of fortunes. Bank stocks have slid by about 1 per cent year-to-date, versus a 16.5 per cent rally after the US election to the end of the year.

Financial sector equity funds lost $750mn globally over the past week, ending 16 straight weeks of inflows, with $580m exiting US funds. Industrial-focused equity funds saw their biggest outflows since November 2015.

Gold funds — typically a safe-haven investment — had their biggest inflows since early August, with $1.5bn of new money pouring in. US bond funds continued their positive start to the year with a further $2.7bn flowing in.

Analysts at Capital Economics said that “while the price of gold may continue to benefit now and again from the uncertainty generated by Trump’s presidency and Brexit, we still think that it is likely to end the year lower than it is now”.

Globally, equity funds performed better, receiving $1.7bn of new money.

Jim Paulsen, chief investment strategist at Wells Capital Management, said positive economic data out of the US and globally suggest that the rally will resume, pushing stock prices and bond yields higher.

Strong data on labour and housing on Thursday underpinned hawkish remarks from Fed chair Janet Yellen the previous day. Ms Yellen warned that the US risked a “nasty surprise” if policymakers held off on raising rates again for too long.

“The data are loudly screaming that recovery may finally be here,” Mr Paulsen said. “I don’t see that quitting the day after Trump is inaugurated. I think we will be buying after the inauguration again.”