The Strategist

Investors are leaving developed markets

02/18/2019 - 14:19

At the beginning of the year, international investors have significantly reduced their investments in the American and European stock markets. Apparently, they see no adequate returns amid growing expectations of a slowdown in the economies of these regions. As an alternative, investors choose companies from developing countries, which fell in price last year and now look undervalued.

The Bank of America Merrill Lynch data (taking into account the EPFR data) indicate a declining interest of international investors in investments in developed markets. For the week ending February 13, clients withdrew more than $ 0.6 billion from funds whose investment declaration is focused on US stock markets. Since the beginning of the year, funds of this category have lost $ 41.4 billion. The low popularity of American stocks is confirmed by the February survey of portfolio managers from analysts Bank of America Merrill Lynch. The number of managers who reduced the share of American companies in their portfolios exceeded those who continued to increase it for the first time since April last year.

The main reason is the US foreign trade policy. Investors fear that the trade confrontation with China may rebound on the US economy, which in recent years has shown high growth rates. This worries not only investors, but also the IMF, which over the past four months has twice lowered the forecast for US economic growth rates. In January, the international organization announced that the baseline scenario expects US GDP to increase by only 2.5%, which is 0.2 pp lower than October expectations.

Internal political situation in the country also adds nervousness. The conflict between Congress and the US president has a negative effect on investor sentiment. Due to disagreements between the two branches of government on financing the construction of a wall on the border with Mexico, there was a halt, which led to the longest partial shutdown of the government and all state services in history. Only last Friday, Sarah Sanders, the White House press secretary, said that in the near future Donald Trump will sign a compromise version of the bill on government financing, which will prevent another shutdown.

However, international investors are actively withdrawing funds from European assets. According to the EPFR, since the beginning of the year, the outflow of funds from European funds amounted to $ 15 billion. This is also facilitated by signs of a slowdown in the EU economy. According to Eurostat, in the third quarter of last year, euro zone GDP increased by 0.2% in quarterly terms and by 1.6% in annual terms. In July and September, the growth was 0.3% and 1.8%, respectively. Attractiveness of investments in European assets is influenced not only by the economic situation in the region, but also by Brexit and the growth of populist sentiment in the region.

At the same time, the situation in the market is uncommon: investors are willingly buying assets of developing countries. According to the EPFR, since the beginning of the year, EM funds have attracted almost $ 19 billion. The outflow of US stocks can be largely explained by the desire of investors to “buy emerging markets”, which were the main outsiders last year, which means they have the potential to grow.