June 10, 2022

Homeward Bound: Capital Flows from International Equity into Domestic Equity Funds

by Jack Fischer.

The Department of Labor reported today that the Consumer Price Index (CPI) increased at a 12-month rate of 8.6%—marking the largest annual increase since December 1981. Core-CPI, which excludes food and energy, also rose more than economist predictions, hitting 6% year-over-year. Food increased 10.1% from last year, while fuel oil prices spiked 106%.

The World Bank downgraded its 2022 global growth estimate to 2.9%—the bank originally forecasted a 4.1% increase back in January. World Bank President David Malpass said, “For many countries, a recession will be hard to avoid…Markets look forward, so it is urgent to encourage production and avoid trade restrictions.”

Other big international news came out of the European Central Bank (ECB). The ECB announced that it will raise interest rates next month for the first time in more than a decade. Officials plan on increasing the lending rate by 25 basis points (bps) at their July meeting—moving it from negative 0.5% to negative 0.25%. Prices in the region grew at a record annual rate in May (+8.1%). Members of the ECB warned that there may be a larger increase at their September meeting depending on the inflation outlook at the time. Much like the Federal Reserve, the ECB is ending its asset purchase program which was originally put into action to add liquidity to markets at the start of the COVID-19 pandemic.

Economic tightening abroad has caused international equity funds to suffer massive outflows. This last week, international equity funds posted $3.6 billion in weekly outflows, marking its eighth straight week of redemptions and its second-largest weekly outflows this year. Last month, international equity funds had $8.3 billion in outflows, their first monthly outflow since February 2021, and are on pace to record their first quarterly outflow since Q4 2020.

Before this eight-week stretch of outflows, this group was red hot, logging 25 weeks of inflows in 28. Investors have chosen to bring their capital closer to home, injecting $27.9 billion into domestic equities in May and $89.4 billion since the start of the year.

Domestic equity funds this last week reported $3.7 billion in net inflows, marking its fourth straight week of inflows. Their four-week moving average of positive $5.2 billion is the largest total since March. April saw Domestic funds observe their largest monthly outflow in more than three years (-$36.0 billion), but it is now safe to say the tides are turning.

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