(Bloomberg) - A rotation out of U.S. equity markets in favor of global peers may be only just getting started, Citigroup Inc. strategists said, joining a chorus of cautious calls about Wall Street’s prospects.
“Investors are starting to show a preference for global funds that exclude the U.S.,” Citi strategists led by David Groman wrote in a note to clients. While Citi isn’t “especially bearish” on U.S. equities, “the stage seems set for investors to allocate capital elsewhere,” they said.
U.S. equity funds attracted about $400 billion inflows in 2021, about as much as international funds, according to Bank of America Corp. and EPFR Global data. The trend is starting to shift, according to Citi, with flows into equity funds that exclude the U.S. outpacing U.S.-inclusive funds for seven out of the last eight months as a share of assets under management.
These moves mirror a reversal of fortunes seen in the market this year, with the S&P 500 underperforming the MSCI All-Country World Index after a ferocious rally in 2021 that saw the U.S. benchmark climbing to successive record highs. With investors now pricing an aggressive tightening campaign by the Federal Reserve to tame surging inflation, expensive and tech-heavy U.S. equities valued on future growth expectations have come under particular pressure.
As an alternative to the U.S., equity strategists from Morgan Stanley to JPMorgan Chase & Co. have been recommending European equities, as investors shift to cheaper, so-called value stocks. Still, the rotation so far has been small, and not enough to close valuation gaps that had been pushed “to extremes,” according to Citi’s note.
“There is still plenty of capital available to drive further rotation,” Citi’s strategists said. As potential opportunities for investors seeking to diversify outside the U.S. they highlighted the U.K. as a classic value trade, as well as Japan where earnings momentum looks “healthy,” and China, which is easing policy while developed markets are tightening.
By Nikos Chrysoloras
