Although US equities were off to a roaring start in 2023, it was apparent during the first six weeks of the year that investors were inclined to favor exposure to the rest of the world.
After a long stretch of outflows, European equity funds attracted new money, and inflows to emerging market stocks and bonds were a tsunami.
Appetite for assets of all kinds waned in recent days, but consider that during the first five weeks of 2023, EM stock and bond funds saw a combined $36.5 billion inflow. Last week, amid risk-off sentiment, EM equities saw their first outflow in eight weeks. Chinese stocks witnessed the biggest weekly outflow in 11 months, cutting what was an $11.5 billion YTD haul down to $8.6 billion.
US equity funds shed $7.7 billion last week. It was the first outflow in three weeks, and brought the total, YTD net exodus to more than $15 billion.
This isn’t difficult to explain. Headed into 2023, optimism was building around the outlook for the European and Chinese economies. Europe averted the existential energy crisis many feared, and although scores of Chinese were dying every day from an unshackled COVID, the assumption among market participants was (and still is) that once herd immunity is established, the world’s second-largest economy will be poised to recover, with the help of fiscal and monetary stimulus as Xi focuses on reviving growth.
By contrast, investors assumed the US economy would stumble early this year, perhaps into recession, opening the door to a Fed pause. When considered with the improving outlook for European and Chinese growth, the combination of an underperforming US economy and the extension of dollar weakness tied to a less aggressive Fed, it’s not hard to understand why investors favored ex-US equities.
The figure on the left from Goldman gives you some context. Note the recent ETF outflows. The figure on the right just shows one way to break the data down. You can slice and dice the EPFR figures however you like — suffice to say their data is granular.
The Wall Street Journal on Sunday ran a feature story citing Lipper data and making the same general point about flows. “Investors have pulled a net $31 billion from US equity mutual funds and ETFs in the past six weeks, mark[ing] the longest streak of weekly net outflows since last summer and the most money pulled in aggregate from domestic equity funds to start a year since 2016.”
It’ll be interesting to see if these trends shift going forward given ongoing strength in the US labor market, mixed results from China’s recovery so far and escalating geopolitical tensions which could compel investors to rethink allocations both to Europe and China, either by choice or by executive order, respectively.
H. You left out the charts.
Now I have them. Thanks
That’s (another) weird Twitter thing. I mean, it’s not necessarily Twitter’s “fault,” but the issue is that when I don’t use a banner image for the articles (which I don’t on the ‘Duly Noted’ columns because it clutters up the home page), Twitter pulls the first chart from the article and posts it (to Twitter). That’s not ideal because in most cases, the charts I make for ‘Duly Noted’ articles are intended for HR+ subscribers. So, I put in a tiny, tiny (~2 seconds) delay on the ‘Duly Noted’ charts so that Twitter doesn’t pull them. In most cases, you won’t notice it because by the time the page loads, they’ll load too. But if you’re lightning-fast on the click, you might need to refresh the page. Again: The delay is less than 2 seconds, and I’m working on a better solution. In any event, 99.99% of the time you won’t notice it.