European equities extended their third-longest streak of net redemptions in the latest week, driven by outflows from UK equity funds on concerns about Brexit.
Investors withdrew $446m from funds that specialise in UK equities in the week to Wednesday, marking the 10th straight outflow, according to EPFR Global. The withdrawal helped to push the net outflow from European equities funds to $166m and its 25th consecutive week of redemption.
“When it comes to the UK, there is a lot of concern about what is going to be happening with Brexit — the chance of there being a no-deal or a hard Brexit — the impact could be significant from day to day getting goods from the EU to more operational issues around trading securities,” said Max Gokhman, head of asset allocation at Pacific Life Fund Advisors.
While capped by Brexit concerns this week, European funds have been dogged for the past several months by weaker economic growth compared with the US — where the economy and corporations are enjoying a boost from tax cuts and other stimulus — as well as political concerns around the rise of populism in Italy.
Elsewhere, investors’ conviction around US equities solidified as indicated by a $7.2bn net inflow to these funds, the highest amount in 11 weeks, and a rise in benchmark indices such as the S&P 500 to fresh all-time highs.
“A lot of investors are playing offence when they can and defence when they need to,” said Matthew Bartolini, head of SPDR Americas research at State Street Global Advisors. “US equity right now is the best place to play offence. The US is still benefiting from a significant amount of stimulus. GDP is above 4 per cent, unemployment is below 4 per cent and earnings growth above 20 per cent for two consecutive quarters.”
Investors also drew comfort this week from a US bilateral trade deal with Mexico to revamp Nafta, even if it remains unclear whether Canada, the trade pact’s third partner, would sign up to the revised agreement and what the outcome meant for US trade relations with China.
Investor appetite for emerging markets, where funds have seen significant outflows this year, returned, but the rebound may be shortlived given a flare-up of economic turmoil in Argentina on Thursday, a day after EPFR’s reporting period.
Emerging market equity funds took in $404m, only their second inflow during the past 15 weeks, and emerging market bond funds eked out a $46m intake, snapping a four-week outflow streak.
“There has not been a fundamental reason why news on Argentina or Turkey would result in a sell-off or rally in emerging markets assets whereas we have seen a lot of that,” Mr Gokhman said, arguing that the two countries represent a small amount of the emerging markets universe, especially when compared with Asian countries.
“It is sentiment-driven buying and selling.”
Get alerts on Brexit when a new story is published