Inflation signals and shifting rate cut bets drive investors toward Europe and emerging markets
A sharp US$13.6bn moved into global ex-US equity funds in July, the largest monthly inflow since December 2021, as per LSEG Lipper data reported by Reuters.
Investors increasingly redirected capital away from the United States, citing economic concerns, high stock valuations, and a weakening dollar.
According to S&P Global, July’s US Consumer Price Index (CPI) rose 2.7 percent year-on-year, unchanged from June and below market expectations.
While this bolstered market conviction for a September interest rate cut—pricing in nearly 100 percent likelihood compared to 86 percent before the CPI release—PMI Output Prices data indicated inflation could approach 4 percent in coming months, largely due to higher tariffs.
Such a trend could limit further rate cuts even if the Federal Reserve moves in September.
Reuters noted that these global ex-US inflows began earlier in the year as US President Donald Trump’s economic policies reduced the appeal of US markets.
July’s surge reflected a sustained push toward diversification, especially into Europe and emerging markets benefiting from looser monetary conditions and stronger growth prospects.
The MSCI Asia Pacific ex-Japan index gained about 14 percent and the MSCI Europe index rose more than 19 percent this year, both outpacing the S&P 500’s 7.2 percent rise.
The US dollar’s roughly 10 percent decline in 2025 further amplified international returns for US-based investors.
Shelton Capital Management Chief Investment Officer Derek Izuel said that while tariff de-escalation helped in the second quarter, unresolved trade talks and policy deadlines in early Q3 posed ongoing risks.
Persistent uncertainty, he added, could fuel more US equity outflows if growth gaps narrow or the Federal Reserve keeps policy restrictive.
S&P Global’s latest Investment Manager Index for early August showed central bank policy had shifted from being a positive to a neutral factor for US equity returns.
Confidence in further rate cuts weakened, while macroeconomic concerns grew, prompting more defensive positioning.
Bullish sentiment for financials and IT sectors declined, while utilities gained favour and bearish sentiment toward consumer staples eased.
Basic materials moved from a bullish to a bearish outlook.
SEI Chief Investment Officer Jim Smigiel viewed the recent global ex-US inflows as a strategic rebalancing to neutral geographic positioning rather than a decisive underweight to the US.
Reuters data showed the forward 12-month price-to-earnings ratio for the MSCI US index at 22.6, above MSCI Asia’s 14.4, MSCI Europe’s 14.2, and MSCI World’s 19.7.
S&P Global noted PMI-based signals pointed to US dollar weakness in August, with the index already trending lower since early in the month.
Growth stocks remain positioned to outperform in the near term, though S&P Global cautioned that tariff-related inventory gains in early 2025 could reverse by year-end.
