US fund managers are increasing investments in international stock markets after rising interest rates and fears of an economic slowdown brought an end to more than a decade of domestic dominance.
US stocks have vastly outperformed most other developed and emerging markets since the financial crisis, but the trend began to reverse last year.
The Europe-wide Stoxx 600 index has now posted stronger returns than Wall Street’s S&P 500 for four consecutive quarters, its longest period of outperformance since 2008. European stocks did decline in the middle of last year, but losses were milder than in the US, and asset managers that rode the US growth trend have recognised the need to diversify.
“If you look at the distribution of our asset management, we have a large concentration in the active US equity space,” said Rob Sharps, chief executive of T Rowe Price, the $1.3tn fund group know for its active management. “It’s what we’re known for, but it’s also a part of the market that is losing share.”
Sharps said T Rowe was working to boost its capabilities in international fixed income and global equities. “While we are really well known for capabilities in active US equity, I’d love the opportunity to grow in those other asset classes,” he added.
The BlackRock Investment Institute has also said it expected US equities to underperform stocks in emerging markets, Europe and China over the coming decades, albeit with a wide range of potential outcomes for China.
Meanwhile, PineBridge Investments, which manages $143bn in assets, said in its latest strategy note it had adopted a “more cautious stance on broader US stocks, particularly given today’s overvaluation teamed with the upcoming tightening in credit and risk aversion by banks” as well as the Federal Reserve’s withdrawal of bond market support. It has a more positive stance on emerging markets including China and India.
Investors have pulled $34bn from US equities funds so far this year, according to data provider EPFR. Europe, in contrast, has seen $10bn of inflows.
The US retains comfortably the biggest stock market in the world. The market capitalisation of the S&P 500 stands at $34tn, compared with just under €10tn on the Euro Stoxx 600. Still, a combination of macroeconomic factors and differences in market structure are encouraging a shift. US dominance over the past decade was powered by outsized gains for large tech groups, which have been particularly badly hit as rising interest rates reduce the relative appeal of long-term growth assets.
European indices, in contrast, are more heavily weighted towards industries such as financial services and commodities, which are less badly affected by high rates.
At the same time, a warm winter helped the European economy hold up better than most economists had expected, rebounding strongly from last year’s energy crisis.
In Asia, meanwhile, almost $16bn has flowed into Chinese equities funds, encouraged by Beijing’s reopening after years of stringent coronavirus restrictions. That reopening has also helped in Europe, which is more reliant than the US on exports to China.
China accounted for almost half of the $34bn inflows into emerging markets more broadly, according to EPFR. Frank Brochin, senior portfolio manager at The Colony Group, a US wealth manager, said “to some extent investors are realising that China is investable again”.
Brochin said the increasing sophistication of investors such as charitable foundations, endowments and family offices should also provide a longer-term boost to US investments overseas, but the trend may provide more benefits for local firms than US managers.
“We [mainly] use local managers because they have a depth of knowledge and understanding of those markets which is hard to reproduce,” he said.