Meanwhile, investors continue to struggle to find income, with bond yields in most countries hitting new lows. The low yield environment is pushing them into bond market substitutes. Last week $2 billion flowed into equity income funds.
Market Realist – The low-yield environment is causing investors to shift to non-US equities.
The low-yield environment is causing investors to shift to equities. However, investors are moving away from US equities. They’re shifting investments to other parts of the world. European (EZU) and Japanese (EWJ) equities advanced last week by almost 2.5% and 3%, respectively. In contrast, US equities actually fell last week, as we discussed in the first part of this series. European and Japanese markets outperformed the US markets year-to-date, or YTD—as you can see in the previous graph. The graph shows the returns from the iShares MSCI EMU ETF (EZU), the iShares MSCI Japan ETF (EWJ), and the iShares Core S&P 500 YTD.
According to BlackRock, the week ending February 27, 2015, marked the eighth consecutive week of outflows for US equity funds. This marks the longest streak of outflows since 2004.
US corporates are facing currency headwinds
The continued strength of the US dollar is impacting US corporates in a big way. It affected beverage companies’ sales—like Coca-Cola (KO) and PepsiCo (PEP). Microsoft (MSFT) expects revenue growth to take a 4% hit in 1Q15 due to currency headwinds. Apple (AAPL) recently reported its best quarter ever in terms of earnings. It also expects its gross margins to fall by 1%. It expects to fall by 5% in 2Q15 due to dollar appreciation. Hewlett Packard (HP) announced that it expects annual revenue to decline by $3.3 billion due to currency appreciation. McDonald’s and Procter & Gamble (PG) are already suffering from dollar appreciation.
European equities are benefiting
In contrast, European equities are benefiting from the improved political climate after woes about Greece and Ukraine settled down. It appears that data picked up as well. In January, German industrial output rose for the fifth consecutive month. German retail sales surged 2.9% in January. This overshot all of the analysts’ expectations. The improvement in data isn’t restricted to Germany. In 2014, Spain showed its fastest GDP (gross domestic product) growth in seven years. You can see this in the previous graph.
Read on to the next part of this series to understand why investors are looking to Australian equities amid their search for yield.