On Capitol Hill, a deal is finally in the works to avoid what would have been a catastrophic default by the U.S. Treasury, but investors still got spooked. Last week, stocks in the United States had their worst week of the year. The Dow Jones Industrial Average and S&P 500 both fell by about 4 percent on fears that the United States may not be able to finance its debts. In addition, investors have pulled more than $140 billion from money market funds since the second week of July, according to fund flow tracker EPFR Global. At the same time, investors sought safety in another large developed economy, Germany.
So far this year, investors have dumped more than $15 billion into German stock funds, according to EPFR. And $3 billion of those inflows came in just the last week, ending July 27. Meanwhile, U.S. stock funds have only seen only $5.5 billion in inflows year-to-date. That's a sharp drop from the beginning of May when cumulative net flows for the year peaked in the neighborhood of $35 billion, says Cameron Brandt, director of research at EPFR. "U.S. equities had a very strong start to the year … and that has eroded very rapidly," Brandt says. "And the money really seems to have switched into German equity funds."
That's because Germany, while still potentially exposed to the ongoing sovereign debt crisis in some of the peripheral countries like Greece, has the strongest economy in the European Union. At times, it's hard to separate it from troubled Eurozone nations, as Germany remains on the hook for a large portion of the bailouts for those countries. But as one of Europe's leading exporters and the world's fifth-largest economy, Germany is viewed as more of a safe haven asset class, much as investments in the U.S. have been in the past. "It's worth noting, and I think it does reflect at least for the moment a sense that within the developed markets universe, Germany may be the best of a troubled bunch," Brandt says.
However, the movement may only be temporary. Brandt notes that most of the recent flood of money has been invested in passively managed Germany stock exchange-traded funds (ETFs). That could signal investors looking for only a short-term safe haven as ETFs are much more liquid than mutual funds, meaning investors can quickly move their money in and out, Brandt says.
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Going forward, Brandt says this may only be a short-term phenomenon as Congress resolves the debt ceiling fight and the spotlight moves back to the debt problems in Europe. But if a major ratings agency such as Standard & Poor's decides to strip the United States of its pristine AAA rating anytime in the near future, Brandt says he wouldn't be surprised to see more money flow back into German stock funds.