Mutual Fund Flows Change Course As Skepticism Grows Of Reflation Trade

The flow of money in the $17 trillion mutual-fund industry in recent weeks is signaling that investors across asset classes are increasingly skeptical of the reflation trade.

From global equities to U.S. municipal debt, fund flows have changed course relative to the post-election stretch when investors wagered that stronger growth and inflation would lift stocks and bond yields. Instead, the S&P 500 index is coming off its first two-week slide since January, while 10-year Treasury yields are close to the lowest level since November.

The reflation theme hinged in large part on the assumption that the Trump administration would enact its fiscal promises, most notably tax reform. That hasn’t happened, and traders are losing confidence in progress on that front after the failure of health-care legislation, and as geopolitical tensions divert the attention of the president and Congress.

“We’re definitely seeing more sustained caution about the new president’s ability to turn his rhetoric into legislative and regulatory action,” said Cameron Brandt, director of research at EPFR Global, which analyzes flows in more than $17 trillion of mutual funds. “There are plenty of signals that people want to see something tangible.”

Here are a handful of signs that investors are stepping away from reflation wagers.

Equity Outflows

U.S. equity funds saw almost $15 billion of outflows in the week ended April 5, the biggest withdrawal since the third quarter of 2015, and money barely returned the following week, according to EPFR data.

U.S. stock benchmarks fell further from record highs last week amid escalating geopolitical concerns and confusion about the future of Trump’s growth agenda. The S&P 500 has pared its year-to-date gain to about 4.6 percent, with investors favoring funds tracking shares of overseas companies.

“You’re coming up to a bit of a gut-check with first-quarter earnings season about to kick off,” Brandt said. “And if you’re looking at comparative valuations, you might certainly conclude that emerging markets and Europe offer value.”