Investors Start to Unwind the $540 Billion America First Trade

The America First trade that sent money gushing to the US over the past three years is finally starting to lose its shine as market optimism gravitates back to unloved markets outside of the world’s biggest economy.

In the first few weeks of the year, analysts at HSBC Bank Plc and Barclays Plc have upgraded their recommendations for equities in Europe and emerging markets and strategists at Goldman Sachs Group Inc. forecast that inflows to non-US assets will accelerate. Cash has rushed into funds that track the two regions and underweights on US stocks have surged to their highest in eight years, according to Bank of America Corp.’s global fund manager survey.

It’s a reversal of a trend that’s seen some $540 billion pour into US equities since 2019, according to estimates by Barclays citing EPFR Global data. The America First trade, built on the idea that growth would keep pumping up corporate earnings in the US, is losing its allure as the risk of rising interest rates and an energy crisis abates in other markets. That’s focused attention on how cheap their assets are by comparison.

“It’s reasonable to expect rest-of-the-world equities to outperform the US for some time this year,” said Chris Iggo, chief investment officer of core investments at AXA Investment Managers. “Valuations were much more attractive in Europe and Asia so there is more upside relative to US equities which, on a market cap basis at least, are still very expensive.”

The trend is already showing up in returns data. An index of global stocks minus the US is headed for its third best month in the past decade with a 7.9% gain, while the S&P 500 has climbed just 2.3%. The US equity benchmark plunged the most in a month Wednesday as signs of an economic slowdown showed up in data on consumer demand and business investment. The index of global stocks excluding the US added 0.5%.