Global Investors Shift Billions to Europe and Emerging Markets Amid U.S. Economic Concerns
Global ex-U.S. equity funds recorded their largest inflows in more than four-and-a-half years in July, as investors sought higher growth potential and better valuations outside the United States. According to LSEG Lipper, these funds attracted $13.6 billion last month — the biggest inflow since December 2021 — while U.S.-focused equity funds suffered $6.3 billion in outflows, marking the third consecutive month of withdrawals.
The investment shift has been driven by multiple factors, including worries over the U.S. economy, stretched stock valuations, and a weakening dollar. Analysts say President Donald Trump’s recent economic policies have reduced the appeal of U.S. markets, prompting global diversification into Europe and emerging markets, where monetary conditions are more supportive and growth prospects are improving.
Market performance has reinforced this trend. The MSCI Asia Pacific ex-Japan index has risen about 14% this year, while the MSCI Europe index has gained over 19%, both outperforming the S&P 500’s 7.2% increase. Additionally, a roughly 10% drop in the dollar has boosted returns for U.S. investors holding foreign assets, making overseas markets more attractive.
Derek Izuel, Chief Investment Officer at Shelton Capital Management, noted that while tariff de-escalation helped in the second quarter, unresolved trade negotiations and upcoming policy deadlines could reignite outflows from U.S. equities. “Persistent uncertainty could drive further diversification if growth differentials continue to narrow or if the Federal Reserve maintains restrictive policy,” he warned.
Valuation gaps are also influencing investor behavior. The forward 12-month price-to-earnings ratio for the MSCI U.S. index stands at 22.6, compared with 14.4 for MSCI Asia, 14.2 for MSCI Europe, and 19.7 for the MSCI World index. While some strategists, like SEI’s Jim Smigiel, see the shift as a strategic rebalancing rather than a permanent underweight to the U.S., the current momentum suggests a growing preference for international exposure.
Source: Reuters