Broad global economic growth powers international fund flows

As the US stock market climbs further into record territory, investors are increasingly putting money on a relatively less expensive alternative: funds that own international equities.

Inflows to long-term mutual funds and exchange-traded funds (ETFs) focused on international stocks have been increasing this year and also outpacing flows into funds invested in US stocks, according to data from the Investment Company Institute.

The trend reflects optimism on the part of investors that the broad global economic resurgence that began last year will continue in 2018 and this sets the stage for international stocks to deliver stronger earnings and potentially see their share prices move higher. International stocks have not had as big a run-up as US equities in recent years, which make the non-US stocks a relatively cheaper buy for investors.

“Non-US investing is a great way right now to play the strong synchronised growth theme,” said Jon Eggins, senior portfolio manager at Russell Investments. “We see stronger likely economic growth and earnings growth outside the US versus in the US, even with the recent tax reform.”

As recently as 2016, the global economy was still stuck in a slump in the aftermath of the Great Recession of 2007-2009 and a debt crisis in Europe. China’s economy was slowing steadily, raising fears of economic fallout in the developing countries that supply raw materials to the world’s second biggest economy.

That changed last year, as the global economy picked up, with Europe, Japan, China and many developing nations growing in tandem for the first time in a decade. All told, 120 countries, representing three-quarters of world economic output, enjoyed economic growth in 2017, creating the broadest global expansion in seven years, according to the International Monetary Fund.

So what’s the outlook for 2018? The international lending agency recently forecast global growth of 3.9 per cent for this year and next year, up from an estimated 3.7 per cent gain in 2017. In its outlook, the IMF noted surprisingly strong growth in Europe and Asia.

While stronger economies overseas have helped boost the profits of US multi-national corporations – one of the reasons why Standard & Poor’s 500 stock index delivered strong gains in 2017 – international stocks have not experienced as big a run-up as US equities. This is why many investors, betting on the thesis of continued global growth, continue to shift money into funds that focus on overseas companies.