Investors are funneling billions of dollars into international markets and related exchange traded funds as more turn to seek out opportunities outside a pricey U.S. equity market.
Global fund flows reveal a shift out of U.S. equity funds and into European and emerging market funds over the past few weeks, and analysts expect recent developments could keep the trend going, the Wall Street Journal reports.
For instance, among the most popular plays over the past week, the iShares MSCI EMU ETF (NYSEArca: EZU) attracted $876 million in inflows while the iShares MSCI EAFE ETF (NYSEArca: EFA) added $740 million and Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) saw $396 million in inflows, according to XTF data.
Supporting the improved international outlook, European equities have been reporting improved economic data for months. The European corporate earnings season is also on track for its strongest quarter in a decade, according to Morgan Stanley. Additionally, centrist Emmanuel Macron’s victory over far-right candidate Marine Le Pen in Sunday’s French presidential election assuaged wary investors.
“The French elections have loomed large…as a potential restraining force on risk appetite,” Michael Metcalfe, head of global macro strategy at State Street Global Markets, told the WSJ. “Assuming that earnings growth continues…and we see this expected rebound in the hard data” then markets can continue to push higher.
Meanwhile, U.S. equity funds experienced $22.2 billion in net outflows over the seven weeks ended May 3, the largest seven-week redemption in over a year, according to EPFR Global. In contrast, net inflows into European funds in the first four months of the year hit a two-year high.
Emerging markets are also attracting investment interest as strong manufacturing, industrial production and trade data helped support the strongest four-month stretch of net inflows to emerging market funds since 2013.
“The tables are beginning to turn,” Brian Singer, portfolio manager at William Blair & Co., told the WSJ. “The interest of investors, the conventional wisdom and now the capital flows are starting to shift.”
Fueling the changing sentiment, some argue that U.S. equities look overvalued compared to the rest of the world, especially after the multi-year rally that pushed cyclically adjusted price-to-earnings ratio, or CAPE, to 22x, compared to 16.7x in Europe and 13.7x in emerging markets.
Furthermore, investors are betting on improving economic growth returning to international markets, notably Europe after nearly a decade of false starts.
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