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Rational or irrational exuberance?
Investors raced this week into a wide variety of equities funds, with optimism remaining high after a year of strong returns for the stock market.
Flows into mutual and exchange-traded funds reached a six-month high of $24bn in the week to January 10, according to EPFR data analysed by Kenneth Chan at Jefferies. That represented a sharp bounce back from an outflow of $4.7bn in the previous week.
Mr Chan said that flows towards equities funds were “broad-based”: emerging market inflows clocked in at $4.5bn, the highest level in a year and a half. Developed market inflows were $19.1bn.
Flows into funds tracking US stocks rebounded with an inflow of $8bn after an outflow of $9.4bn in the first week of 2018. Meanwhile, inflows into Asia funds this week were at a tw0-and-half year high, while European funds garnered their best inflows in almost eight months.
“By sector, strong inflows were seen within information technology, industrials and financials,” said Mr Chan, who added that tech inflows were the highest since December 2014.
The bullish start to 2018 comes after global stocks recorded last year their best performance since 2009, with the FTSE all-world index jumping almost 22 per cent.
Investors have cited the pick-up in economic growth across many major economies as a reason for their upbeat spirit. Fiscal stimulus from US Congress in the form of tax reform has also heightened profit expectations for US equities, the largest such market in the world.
The gains have come even as central banks have begun to pull back on their crisis-era stimulus measures, something that has been widely cited as a risk to the bull run in equities.
Looking ahead, many investment houses are forecasting further rises for the global stock market. Goldman Sachs, for instance, issued research this week saying it expects gains over the next 12 months of 7 per cent for the US S&P 500, 8 per cent for the Stoxx Europe 600 and 10 per cent for Japan’s Topix (see chart below).
Jim Paulsen, chief investment strategist at The Leuthold Group, said that “one of the most striking aspects of the new year is ‘optimism’ … The sun is shining both on Wall Street and Main Street”.
But the finance industry veteran cautioned that “happiness on Main often raises Wall Street risks by producing overheat pressures in combination with high valuations.”
“Often, when it finally gets good on Main, it goes bad on Wall,” he said.
Image source: Getty