September 5, 2018 / 4:29 PM / 15 days ago

Investors back off U.S. stock funds for first time in three weeks: ICI

NEW YORK (Reuters) - Investors spooked by trade-war fears took a cautious stance, pulling cash from U.S.-based stock funds for the first time in three weeks, the Investment Company Institute (ICI) said on Wednesday.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., August 31, 2018. REUTERS/Brendan McDermid

Markets face the prospect of a trade war that threatens to spoil global economic growth. At the same time, the Federal Reserve has signaled little sign of deviating from hiking U.S. interest rates, giving safe U.S. bonds more attractive yields and attracting money from abroad.

Trade conflict, rate hikes and eroding investor sentiment have conspired to push the dollar higher, pressuring developing markets that need to repay debts with greenbacks that are harder to come by.

U.S. equity mutual funds reported an elevated $8.1 billion in withdrawals during the week ended Aug. 29, nearly offset by $7.4 billion reeled in by stock exchange-traded funds (ETFs), the trade group’s data showed. Together, the funds reported net withdrawals of $684 million.

ETFs are heavily trafficked by quick-trading investors while mutual funds are more exclusively used by long-term retail investors.

During the week, traders took solace from a U.S.-Mexico agreement on trade and Fed Chairman Jerome Powell saying there was reason for caution about hiking rates too aggressively.

Yet three years after economic concerns in China convulsed assets worldwide in 2015, long-term investors are again wrestling with the prospect that an emerging market crisis could shake up sanguine markets. MSCI’s broad emerging markets index is down more than 10 percent, including dividends, this year.

“It is often said that the market climbs a wall of worry, and the next 12-18 months should provide plenty to fret about ... trade concerns, mid-term elections, inverting yield curve, rising inflation, tighter monetary conditions and decelerating (earnings per share),” wrote Credit Suisse Group AG U.S. equity strategist Jonathan Golub in a note on Wednesday.

“We believe the market’s path will be determined by something much simpler ... the health and longevity of the business cycle.”

In the meantime, investors seem content to hunker down in debt funds despite many such funds posting negative returns in 2018 as rising rates pushed bond prices lower. U.S.-based bond funds attracted $4.4 billion during the latest week, marking a 28th straight week of positive sales, ICI said.

Reporting by Trevor Hunnicutt; Editing by James Dalgleish

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