European Funds See Inflows For 6-Consecutive Weeks

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Includes: HFEIX, ICEIX, IMASX
by: Zacks Funds

Stock funds attracted $8.4 billion for the week ending Mar 4, according to data from Lipper. This was the biggest inflow since late December. Of these, $6.9 billion was invested in non-U.S. stock funds. U.S.-focused stock funds added $1.5 billion. This came just a week after the U.S. investors had poured the most money into non-domestic stock funds since 2013.

Jeff Tjornehoj, head of Lipper Americas Research said:

I think those investors are expecting a rally in European stocks after the ECB opens the QE (quantitative easing) spigots next week.

As for the broader markets, it has been a mixed week so far. Optimism that the U.S. economy was gradually picking up the pace had boosted benchmarks to record highs on Monday. Nasdaq had closed above the 5k mark for the first time since Mar 2000 boosted by a new deal in the technology sector. However, markets then dropped for two consecutive days, dragged down by dismal monthly car sales and a drop in private-sector employment gains in February, among other factors. Markets rebounded on Thursday, somewhat boosted by the ECB announcing a trillion-dollar stimulus plan that will kick off on Monday. Till close of markets on Mar 5, the Dow and Nasdaq are up just 0.02% and 0.07%, while the S&P 500 is down 0.2%.

Funds Flow Data

As mentioned, while $6.9 billion was poured into non-U.S. stock funds, U.S.-focused stock funds added $1.5 billion. U.S.-focused stock funds were able to witness inflows, after it lost $3.1 billion in outflows in the prior week. This was the biggest outflow in three weeks.

Coming back to this week, U.S.-based European stock funds witnessed inflows for the sixth-consecutive week, adding $708 million for week ending Mar 4. Inflows into these funds may have been due to investors' expectation of a rally as the ECB begins the bond repurchase plan.

Emerging market stock funds added $1.4 billion, the most since Jun 2014. Separately, Taxable bond funds and high-yield "junk" bond funds registered their ninth and sixth consecutive week of inflows, respectively. While taxable bond funds added $170 million, the latter attracted $309 million. U.S. Treasuries funds had the biggest outflows since Jun 2014, losing out on $2.8 billion.

On the other hand, the Investment Company Institute reported total money market fund assets were $2.67 trillion for the week ended Mar 4, down by $18.60 billion.

Markets and Key Developments This Week

On Monday, Nasdaq closed above the 5000 mark for the first time since Mar 2000 boosted by a new deal in technology sector. The Dow and the S&P 500 also touched record highs as the U.S. economy is seen to be gradually picking up the pace. Markets ended in the green, despite reports of a slowdown in manufacturing activity and consumer spending. Meanwhile, interest cuts in China also drove benchmarks higher on Monday. The S&P 500 and Dow closed at a record high for the fifth and fourth time this year, respectively.

Dismal monthly car sales report dragged benchmarks down from their record highs in light volume trade on Tuesday. Profit taking also retreated Nasdaq from its key 5K level. Also affecting the markets was Israeli Prime Minister Benjamin Netanyahu's criticism of White House and Iran's attempts of a nuclear deal.

Markets ended in the red for the second consecutive day on Wednesday, handing the Dow and S&P 500 their worst closing levels since Feb 19. Some opined there was no real panic in the markets. Private-sector employment gains in February were lower than prior month. Separately, ISM services index showed modest improvement.
Markets snapped a two-day losing streak on Thursday, somewhat boosted by the ECB announcing a trillion-dollar stimulus plan that will kick off on Monday. Higher-than-expected initial claims numbers had offset some gains on Thursday. It was the year's second lightest trading session, as investors refrained from betting big bucks ahead of Friday's nonfarm payroll report. The jobs number may influence the timing of the rate hike decision.

ECB Stimulus: The European Central Bank (ECB) announced a 1 trillion euro ($1.1 trillion) bond-buying program. The repurchase is due to start from coming Monday, Mar 9. As announced in January, ECB will buy government bonds worth 60 billion euros a month through a quantitative easing program. The QE program will continue till Sep 2016. ECB President Mario Draghi said this time that ECB would purchase these bonds even if they have a negative yield. However, the negative yield should not cross -0.2%, as they need to be within the level of ECB's deposit rate.

The bank also increased growth and inflation targets. Growth estimates were revised up to 1.5%, 1.9% and 2.1% for 2015, 2016 and 2017 respectively. Draghi said:

The substantial, additional easing of our monetary policy stands, supports and reinforces the emergence of more favorable developments of the euro area economy, financial market conditions and the cost of external finance for the private economy have eased further. Borrowing conditions for firms and households have improved considerably.

Obamacare in Court: Another key event of this week has been the commencement of the third hearing on Obamacare in the U.S. Supreme Court. King v. Burwell is the biggest challenge Obamacare has had to deal with till now and threatens to derail President Obama's signature policy measure.

3 Mutual Funds to Buy

Given the continued inflows into the non-US stock funds and particularly in the U.S.-based European stock funds, we would suggest 3 Non-US Equity funds, that are likely to see further upside. These funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or Zacks Mutual Fund Rank #2 (Buy).

Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

Also, the funds have high total return over the last four weeks, carry no sales load and have low expense ratio. The
minimum initial investment in these funds is $5000.

Henderson European Focus Fund (MUTF:HFEIX) seeks capital growth over the long term. The fund invests a majority of its net assets in equities of European firms. The fund has no limits regarding geographic asset distribution within Europe. It may invest in one country or limited number of countries.

HFEIX carries a Zacks Mutual Fund Rank #2. It has returned 8.1% over the last four weeks. It carries an expense ratio of 1.11% as compared to category average of 1.50%.

Ivy International Core Equity Fund (MUTF:ICEIX) invests a lion's share of its assets, and borrowings, in equities that are mostly traded in developed European and Asian/Pacific Basin markets. To boost return, the fund may also invest in those issuers who are either located or operate in emerging market countries.

ICEIX carries a Zacks Mutual Fund Rank #1. It has returned 5.5% over the last four weeks. It carries an expense ratio of 1.04% as compared to category average of 1.19%.

VY T. Rowe Price International Stock Portfolio (MUTF:IMASX) seeks capital appreciation over the long term. The fund invests a majority of its assets in stocks of companies located outside the U.S. For diversification, the fund invests in among developed and emerging countries. The fund emphasizes large-cap companies, and to an extent also invests in mid-cap firms. However, the fund may invest in companies of all sizes.

IMASX carries a Zacks Mutual Fund Rank #2. It has returned 5.5% over the last four weeks. It carries an expense ratio of 0.77% as compared to category average of 1.37%.