Investors Flock to European Stocks Leaving US Behind, BofA Says

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(Bloomberg) — Investors are chasing European stocks at the fastest pace in nearly a year, while US equity inflows remain muted amid concerns of a recession, according to Bank of America Corp.

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European stock funds had $3.4 billion of inflows in the week through Jan. 25, according to a note from the bank’s strategists led by Michael Hartnett, citing EPFR Global data. This is the largest addition since February, and is only the second week of inflows following 48 straight weeks of outflows. Emerging-market equities led regional comparisons with $7.9 billion coming in. US stocks saw just $300 million, the first positive flow in four weeks.

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European stocks are extending a record outperformance against US equities as investors turn more optimistic over Europe’s slowing inflation, its exposure to China’s reopening and an easing energy crisis. Earlier this year, Hartnett said US equities would underperform global peers. Wall Street strategists are turning increasingly negative on US shares due to the outlook on interest rates, the economic downturn and an earnings recession. 

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Signs are pointing to a US “hard landing” in 2023, the BofA strategists wrote in the note dated Thursday. “Another tightening of financial conditions this spring may be required to tip a US economy currently growing >7% in nominal terms into the recession the consensus craves.”

They noted that the S&P 500 “pain trade” — typically a crowded strategy that tests the resolve of investors — will be around 4,100 to 4,200 points, or as much as 3.4% higher from current levels. “After that we sell,” the strategists wrote, citing a “moment where stock gains start dragging yields higher.”

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Among sectors, Hartnett said flows data show “capitulation” in technology and health care as the outflow trend of the past weeks was the worst since January 2019. By contrast, materials and utilities saw inflows at $700 million and $200 million, respectively.

Bonds had a fourth straight week of inflows at $12.2 billion, exceeded by global equity funds with $13.9 billion coming in. Hartnett added that US money market fund assets hit all-time high at $4.8 trillion. There’s “still lots of liquidity sloshing around.”