Our Chief Cross-Asset Strategist Serena Tang discusses whether
demand for U.S. stocks has fallen and where fund flows are
surging.
Read more insights from Morgan Stanley.
----- Transcript -----
Serena Tang: Welcome to Thoughts on the Market.
I’m Serena Tang, Morgan Stanley’s Chief Cross-Asset Strategist.
Today – is the demand for U.S. assets declining? Let's look at
the recent trends in global investment flows.
It’s Wednesday, July 9th at 1pm in New York.
The U.S. equity market has reached an all-time high, but at the
same time lingering uncertainty about U.S. trade and tariff
policies is forcing global investors to consider the riskiness of
U.S. assets. And so the big question we need to ask is: are
investors – particularly foreign investors – fleeing U.S. assets?
This question comes from recent data around fund flows to global
equities. And we have to acknowledge that demand for U.S. stocks
overall has declined, going by high-frequency data. But at the
same time, we think this idea is exaggerated.
So why is that? As many listeners know, fund flows – which
represent the net movement of money into and out of various
investment vehicles like mutual funds and ETFs – are an important
gauge of investor sentiment and market trends. So what are fund
flows really telling us about investors’ sentiment towards U.S.
equities? It would be nice to get an unequivocal answer, but of
course, the devil is always in the details. And the problem is
that different data sources and frequencies across different
market segments don’t always lead to the same conclusions.
Weekly data across global equity ETF and mutual funds from Lipper
show that international investors were net buyers through most of
April and May. But the pace of buying has slowed year-to-date
versus 2024. Still, it remains much higher than during the same
period in 2021 through 2023. Treasury TIC data point to something
similar – a slowdown in foreign demand, but not significant net
selling.
So where are the flows going, if not to the U.S.? They are going
to the rest of the world, but more particularly, Europe. Europe
stocks, in fact, have been the biggest beneficiary of decreasing
flows to the U.S. Nearly $37 billion U.S. has gone into
Europe-focused equity funds year-to-date. This is significantly
higher than the run-rates over the prior five years. What’s more
notable here is that year-to-date, flows to European-focused ETFs
and mutual funds dominated those targeting Japan and Emerging
Markets. This suggests that Europe is now the premier destination
for equity fund flows, with very little demand spillovers to
other regions' equity markets.
These shifts have yet to show up in the allocation data, which
tracks how global asset managers invest in stocks regionally.
Global equity funds' portfolio weights to Rest-of-the-World has
gone up by roughly the same amount as allocation to the U.S. has
come down. But allocation to the U.S. has actually gone down by
roughly the same amount, as its share in global equity indices;
which means that If allocation to the U.S. has changed, it's
simply because the U.S. is now a smaller part of equity
indices.
Meanwhile, an estimated U.S.$9 billion from Rest-of-the World
went into international equity funds, which excludes U.S. stocks
altogether. Granted, it’s not a lot; but scaled for fund assets,
it's the highest net flows international equities have seen. In
other words, some investors are choosing to invest in equities
excluding U.S. altogether.
These trends are unlikely to reverse as long as lingering policy
uncertainty dampens demand for U.S.-based assets. But as we've
argued in our mid-year outlook, there are very few alternative
markets to the U.S. dollar markets right now. U.S. stocks might
start to see less marginal flows from foreign investors – to the
benefit of Rest-of-the-World equities, especially Europe. But
demand is unlikely to dry up completely over the next 12
months.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
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