European equity funds recorded the largest four-week inflows in nearly the past 10 years, with European stocks outperforming U.S. stocks. European stocks are also seeing the latest weekly inflows recorded since February 2022, before the Russia-Ukraine war began. The surge is due to rising expectations that European governments will pour more funding into defense and infrastructure amid the U.S.’s pullback of its support for Ukraine.
Bank of America Corp. data further revealed that money market funds attracted over $50 billion, gold attracted over $1 billion, stocks drew in over $22 billion, and bonds attracted over $12 billion. Emerging markets and technology stocks contributed to the large inflows experienced over the past few weeks.
Passive fund inflows into European markets have further hit over $6 billion, marking the 10th consecutive week of inflows. Active funds have still seen more outflows this week, losing over $1.2 billion and marking the 43rd consecutive week of outflows. The funds have lost over $11 billion year-to-date.
BofA strategist Michael Hartnett suggested that the current trend seen in European equity funds could continue to outperform U.S. funds, including the Stoxx 600 outperforming the S&P 500. BofA also mentioned that more investors expected European stocks and funds to maintain their strength throughout the year. The bank’s latest Fund Manager Survey indicated that 60% of investors believed in the positive health of European money markets and a sharp sentiment shift from U.S. markets.
The survey also pointed out that the current sentiment shift from the U.S. to European markets is the sharpest rotation seen since 1999. 39% of investors currently hold overweight positions in European funds, compared to 12% recorded last month. 23% of investors also reported underweight positions in U.S. stocks, compared to 17% holding overweight positions last month.
U.S. stocks may continue to underperform in the coming months
The U.S. money markets have been struggling in the first months of President Trump’s administration due to the economic policies now viewed as less-than-favorable. The BofA survey indicated that investors were dumping the U.S. stocks at the fastest rate ever seen, supported by the recent 40-percent-point reduction in investors’ hold on long positions on U.S. stocks. The downturn has benefited other regions, especially Europe and China.
Market indices for the U.S. money markets have also been underperforming, with the Nasdaq Industrial Composite, the S&P 500, and the Dow Jones Industrial Index all dropping over the past few weeks. The indices saw recovery during the weekend for the first time in several weeks but opened lower on Monday as investors failed to maintain the upward momentum.
The reversed momentum has also raised speculation that more Wall Street sell-offs are to be expected in the near future. Deutsche Bank chief strategist Bankhim Chadha recently mentioned that there would be more sell-offs in U.S. equities before the indices recovered, stating the possibility of the S&P 500 recovering by 24%. Morgan Stanley’s chief investment officer, Mike Wilson, also mentioned that there would not be a sustainable rally for a while.
The Fund Manager Survey revealed that 69% of fund managers believed that U.S. stock exceptionalism was ending. The sentiment has also created concerns that U.S. stocks will continue to underperform in the coming months. Goldman Sachs analyst Peter Oppenheimer recently warned that U.S. capital markets had shifted from high to moderate performance. Oppenheimer further commented on the current shift toward other regions’ funds, adding that Trump’s policies could drive the shift further.
European active ETFs receive more attention from ETF investors
The ongoing economic concerns in the U.S. have also shifted ETF investors from U.S.-based ETFs to European active ETFs. The European active ETFs industry is projected to grow to over $1 trillion in assets under management in the coming years.
Wall Street asset management firms, including JPMorgan Chase, Goldman Sach Asset Management, and BlackRock Inc., have expressed interest in launching active ETFs on European exchanges. European Ucits ETFs have also seen a surge in inflows in the past month, with over 33 billion euros flowing into the funds, marking a 16% increase compared to January.
U.S.-based crypto ETFs have seen massive outflows over the past few weeks following the continued economic uncertainty in the country. U.S. Bitcoin spot ETFs shed $5.5 billion in the past 5 weeks, with Trump’s tariffs driving investors away from riskier assets. The massive outflows notably began after Trump’s entry into office in January, with recent crypto-friendly news failing to drive interest in the ETFs. Cryptocurrencies have also been underperforming, with CryptoQuant’s Ki Young Ju recently suggesting that the bull run was over.
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