Following a solid earnings season, investors have shifted money out of Europe and emerging market (EM) funds into US equity and bond funds.
Data from the Institute of International Finance (IIF) and EPFR showed that US equity funds received close to $10 billion in inflows in July while Western European and EM equity funds saw redemptions of $6 billion and $3 billion, respectively.
Fund investors have pushed their US portfolio allocations to near post-election highs in the third quarter amid signs of economic strength and trade frictions. US equities currently account for 57% of global equity allocations.
According to EPFR, the rise in demand from fund investors has been mostly for defensive stocks, such as consumer goods, utilities and telecommunications, which have outperformed cyclical stocks of late.
The inflows mark a reversal in the trend for the first half of 2018, when US markets saw net fund outflows of $17.8 billion.
Singapore-headquartered DBS Bank, for example, has maintained its preference for the US over Europe within developed markets despite downgrading equities to neutral at the start of the third quarter of 2018.
‘Our asset allocation calls have so far been panning out as expected and this positive momentum should persist,’ Dylan Cheang, strategist for DBS’ chief investment office wrote in an investment note.
On a US dollar-based total returns basis, US equities have gained 5.3% this quarter versus a 2.1% rise in European equities, according to DBS research.
Despite a forward price-to-earnings ratio of 17.7% for US equities, which makes them more expensive than European (14.7%) and Japanese (13%) stocks, Cheang noted that fundamentals in the US have picked up since 2015-16.
In the latest earnings season, 84% of companies reported positive earnings surprises, while 71% delivered better revenue figures than expected. The corresponding figures for European companies stood at 35% and 50%.
‘The strong earnings momentum in the US has been driving its outperformance over other developed markets and this trend is likely to persist,’ Cheang added.
DBS currently invests in Salesforce.com, Biogen and Walt Disney alongside consensus names such as Facebook, Amazon and Alibaba.
Within fixed income, IIF and EPFR data showed that fund flows have also mostly targeted the US on the back of a stronger dollar.
In July, global bond fund allocations to the US reached 62.5% - the highest level since 2010 – with a preference for nominal and inflation-protected Treasuries as well as investment grade corporate bonds.
This risk-off mode was evident across global flows in July. About 95% of the total $18 billion in fund inflows globally were directed to bonds.