Global traders flood US markets in search of safety

Nearly $30 billion of new money has flowed into stock funds in the past month, with 94% of that allocation going specifically to U.S. property tech stocks, according to EPFR Global data compiled by TD Securities.

The US buying trade is still on: The S&P 500 outperformed the rest of the world this week by the widest margin in 15 months, while long-term Treasuries gained 3.5% on their way to the best performance until 2024.

Braving a debt crisis and growing political divide, the US is becoming the only choice for international traders seeking stability amid European election tensions and China’s monetary struggles.

Foreign interest in the U.S. credit market is similarly running high. During the first quarter of 2024, foreign investors poured $187 billion into U.S. company notes, according to Torsten Slok, chief economist at Apollo Global Management. That’s a 61% increase over the same period last year.

Inflation is easing in the kingdom with few signs of a slowdown, fueling the latest rally, which has pushed total returns in the tech-heavy Nasdaq 100 above 80% since the start of 2023, the report said. At the same time, funds betting on the rest of the world are also getting crushed.

“The US remains the most stable country, with a mix of AI/tech companies that is unmatched anywhere else in the world,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. He said its dominance “may continue for some time until some of these factors change or a suitable alternative emerges.”

Bloomberg

The week was a microcosm for the U.S.-asset hegemony that has maintained its dominance for large swaths of the past 15 years. Investors turned to havens such as Treasuries, pushing 10-year yields to a two-month low even as the Federal Reserve signaled a slower pace of interest rate cuts. Meanwhile, technology megacaps powered the S&P 500 to its seventh gain in eight weeks, with the index surpassing 5,400 for the first time.

Practically everywhere, stocks fell, with the MSCI World ex-US index down more than 2%. In China, stocks have fallen for five consecutive weeks as a sluggish recovery raises concerns about the need for further monetary easing. A lack of details on the Bank of Japan’s bond purchase plans added pressure on the yen.

The situation in Europe was even worse. French stocks fell by their biggest drop in more than two years, erasing all their gains into 2024, after President Emmanuel Macron’s decision to call a snap election. Investors also sold the country’s bonds, leading to the biggest weekly rise on record in their yield premium over their safer German counterparts.

“The U.S. has the largest and most innovative companies, which have strong earnings growth, and are also benefiting from their safe-haven status,” said Ulrich Urbahn, head of multi-asset strategy at Berenberg. “Momentum breeds momentum. FOMO is clearly a factor as well.”

Bloomberg

While that may be true, US markets are pulling money at a time when many indicators point to an uncertain future. The economy is weakening, the bond market remains jittery amid Fed policy uncertainty and a contentious presidential election. All the enthusiasm for equities has pushed valuation premiums to a two-decade high.

The U.S. asset momentum is causing headaches for anyone following a geographic diversification strategy. Data compiled by Bloomberg show that less than 7% of the 644 exchange-traded funds specializing in international assets have managed to beat the S&P 500. But the top-heavy character of its white-hot stock advance is creating risks domestically, too.

Among long-only mutual funds, technology is almost the only sector to see an increase in industry exposure this year. Banks, healthcare and consumer discretionary companies have seen their underweights grow in these portfolios, according to data compiled by Barclays Plc strategists including Venu Krishna.

According to Qui Nguyen, chief investment officer for equity strategies at Research Affiliates, chasing gains in U.S. stocks is not risk-free, as the biggest technology companies are overweighted.

“We are in a period where large companies have been getting bigger for a long time, and it’s not clear whether economic forces will be able to sustain that,” he said. “Challenges to the dominance of large American companies will eventually emerge,” he said, citing a potential threat from smaller companies or rivals from abroad.