“Buy American” is back in vogue among U.S. equity investors after a years-long global diversification push failed to bear fruit.
Domestically focused equity mutual and exchange-traded funds have booked back-to-back months of inflows, while international funds traded in the U.S. have suffered outflows over the same stretch, according to DataTrek Research co-founder Nicholas Colas. It’s the first time since the trade war heated up in the middle of 2018 that withdrawals have hit non-U.S. oriented funds in consecutive months.
Investors’ U.S. shift has occurred in the midst of a torrid 16 percent advance for the S&P 500 Index this year that has put it within spitting distance of its all-time high and outshined returns in emerging markets, developed markets and global equity benchmarks. Investors put $4.7 billion to work in U.S. equity funds during February and March while taking out nearly $7 billion from internationally-geared opportunities, according to Colas, who cites data from the Investment Company Institute.
This marks a stark reversal of the prevailing trend since 2017, which has seen money move to international equity funds at the expense of domestic counterparts. The thinking in recent years had been that the U.S.’s decade-long bull-market run had gone on for so long and reached such heights that it was inevitable that global markets were poised to play catchup.
That’s no longer the prevailing theory. Bank of America’s March survey of fund managers showed growing pessimism on the global economy. Shorting European equities was judged to be the most crowded trade in markets in the survey, which found two-thirds of respondents expect below-trend growth and inflation globally over the next year.
The shift back to U.S. equities is based on the simple fact that they continue to outperform global alternatives, notes Colas. But on a deeper level, he adds, it could be fostered by deglobalization, a lack of faith in Europe or Japan’s ability to reflate their economies via monetary stimulus, and the elevated weighting of technology stocks in U.S. indexes compared with other bourses.
Lawrence Hamtil, a financial adviser at Fortune Financial Advisors, takes a longer view. Since 1986, American outperformance in equities has been the rule, not the exception, he says.
“Aside from the immediate aftermath of the tech bubble and the ensuing commodity and financial bubble, the U.S. has generally enjoyed superior risk-adjusted returns to the global portfolio,’’ Hamtil wrote in a note to clients. “It seems that no matter how one looks at the data, the last few decades have not been friendly to the global equity portfolio when viewed through the lens of an American equity investor.’’
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