Investors around the globe are pouring money into U.S. financial assets, a sign of confidence that the world’s largest economy remains poised to pull through the Covid-19 pandemic better than many others.
Investors world-wide have funneled more than $900 billion into U.S.-domiciled mutual and exchange-traded funds, on a net basis, during the first half of the year, according to data compiled by Refinitiv Lipper. That is a record in data going back to 1992 and is more than investors have put into funds elsewhere around the world combined during the first two quarters of 2021.
The inflows underpin a rally that has carried U.S. stocks to records, ahead of major indexes in Europe or Asia. The S&P 500 has climbed over 17% in 2021 to fresh all-time highs, while Germany’s DAX has risen 14%, the Shanghai Composite has added 2.2% and Japan’s Nikkei Stock Average remains little changed.
Investors shifted some buying away from U.S. funds at the end of the first half. Flows to U.S. funds were about $51 billion in June, down from $168 billion in May and the first month inflows fell below $100 billion since January. Meanwhile, flows to foreign funds increased to over $93 billion last month, from $84 billion in May.
Still, investors said that while Covid-19 variants, inflation or central-bank policy shifts could slow the U.S. recovery, they don’t seem likely to derail it, even as other countries struggle with vaccine rollouts or fresh waves of infections.
After recent volatile trading sessions, investors this week will parse earnings from companies including Apple Inc., McDonald’s Corp. and Waste Management Inc., as well as details from the coming meeting of the Federal Reserve set to conclude Wednesday.
Monetary and fiscal stimulus policies have powered a savings surge, and many say the U.S. remains the best place to park the cash when it comes to stocks, bonds and other assets.
Foreign investors are expected to put another $200 billion of U.S. equities into their portfolios this year, according to Goldman Sachs, in addition to the $712 billion added in 2020. Foreign holdings of U.S. government bonds in May rose to their highest level since February 2020’s pandemic-fueled rally, according to recent Treasury Department data.
"The U.S. economy has a head start coming out of this pandemic," said Jack Janasiewicz, portfolio manager and strategist at global asset manager Natixis Investment Managers. "There’s plenty of optimism from our standpoint as to why the market can continue to walk up."
Economists surveyed by The Wall Street Journal are forecasting the U.S. economy will grow 6.9% in 2021. That is higher than International Monetary Fund projections for most advanced and emerging-market economies, including the euro area, Japan and the United Kingdom.
That would continue an imbalance that has made U.S. bonds relatively attractive globally since the financial crisis, when the country’s slow, steady growth still outpaced the recovery elsewhere.
Nearly $16 trillion of global debt tracked by Bloomberg Barclays had a negative yield as of July 22, meaning investors are locking in a loss by holding it to maturity. That is below December’s $18 trillion peak, but up from $11 trillion at the end of 2019. Around 70% of the value of positive-yielding bonds among Group of 10 countries came from the U.S., according to Citigroup.
A decline in the dollar has also brought down the cost of protecting foreign holdings of U.S. debt from swings in currencies, analysts said, making returns more attractive when compared with local securities. Foreign bond funds have increased their U.S. holdings to around 25% of assets under management, as of June 30, according to EPFR. That is up from 23% at the end of last year and around 10% at the end of 2019.
"There’s this massive hunger for positive yield, particularly [U.S.] dollar-denominated debt," said Daniela Mardarovici, co-head of U.S. multisector fixed income at Macquarie Asset Management.
Analysts caution that fund flows can often chase recent market winners and that bets on U.S. growth may underwhelm investors’ optimistic expectations. Companies in the S&P 500 traded recently at around 28 times their last 12 months of earnings, according to FactSet. That is near the highest level since 2000.
Matt Dmytryszyn, director of investments at Telemus Capital, said U.S. stocks have proven resilient, but his funds are taking some profits and considering an increase in holdings in Europe.
"We’ve seen that ‘buy the dip’ mentality because of the amount of excess savings out there," he said. "With [U.S.] earnings now back around where they were pre-Covid, we are starting to think there could be more upside abroad."
Investors can miss out on returns by not thinking globally. U.S. stocks returned 8.5% annualized to investors from December 1969 to February 1989, underperforming a 15.5% return from international developed-market stocks, according to data compiled by Richard Bernstein Advisors. From January 1999 to October 2010, emerging-market stocks returned 14.7% to investors, beating a 0.3% gain on U.S. equities.
Recently, however, it has paid to be invested in U.S. stocks.
An MSCI index of global stocks has returned over 10% to investors annualized from 2009 to 2019, but around 5% when excluding U.S. equities. This year, the MSCI World Index has gained more than 14%, but that falls to about 8% without the U.S.
Such attractive returns could still draw more money to the U.S., analysts said. Optimism toward U.S. stocks rose in July among global fund managers surveyed by Bank of America, while bullish sentiment about eurozone and emerging-market equities waned.
"There is so much money on the sidelines," said Rajay Bagaria, chief investment officer at hedge fund Wasserstein Debt Opportunities. "Investment companies have received tremendous amounts of inflows, and as a result, any dip right now is being used as an opportunity to deploy capital."