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Sovereign wealth funds stampede into stocks outside the U.S.

LONDON (Reuters) - Sovereign wealth funds poured a net $7.1 billion into stocks during the second quarter, the most in several years, with the bulk outside the United States, data showed on Thursday.

The funds also pulled a net $5.2 billion out of fixed income during that period, the most since the first quarter of 2019, according to the eVestment data on strategies managed by third-party fund managers.

Global large-cap growth equity strategies took in the most investment during the quarter, a net $6 billion. U.S. equity strategies pulled in only a net $704 million during that time.

That was far short of the flows into U.S. equities in the first quarter as the coronavirus spread around the world.

For a graphic on Sovereign wealth fund net flows in Q2 2020 Sovereign wealth fund net flows in Q2 2020:

“We’re seeing the sovereign wealth funds doing quite a lot of active search activity now in international equities, equities excluding U.S.,” said Matthew Williams, head of institutional sales in Europe, the Middle East and Africa at Franklin Templeton.

“There is usually an increased allocation to equities as a hedging mechanism, given the historical negative correlation between equities and oil prices, and I think that’s evident in what the oil-dependent sovereign wealth funds have been doing.”

Aversion to U.S. stocks might be due to valuations as price-to-earning ratios run at around 29 times amid the S&P 500’s push to fresh highs, as well as uncertainty about the outcome of the U.S. election in November, said Williams.

“Institutional allocators are keeping some of their powder dry on the U.S. equity allocations at the moment,” he said.

Stock investments in public and private markets have contributed to the proportion of sovereign funds’ direct listed deals compared with unlisted ones reaching 50% so far in 2020, the highest level since at least 2014, according to International Forum of Sovereign Wealth Funds (IFSWF) data.

“We have seen more direct investments in public markets and this was partly skewed by large investments Saudi Arabia’s PIF (Public Investment Fund) has made in U.S. equity markets in Q1 and they’ve since sold some holdings, which may explain some of the outflows in the data,” said Enrico Soddu, IFSWF’s head of data and analytics.

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