Biggest inflows to U.S. large caps since April - BAML

U.S. large cap stocks attracted their biggest inflows since April in the week Wednesday to Wednesday, Bank of America Merril Lynch (BAML) data showed on Friday, as investors eyed progress on long-awaited U.S. tax cuts.

The planned tax overhaul will slash the U.S. corporate tax rate to 21 percent, helping to fuel a burst of growth in 2018 according to the U.S. Federal Reserve. It also cheered up investors who have been betting on expansionary U.S. policies all year. 

U.S. equities pulled in $7.8 billion, with U.S. large caps accounting for $7.6 billion of inflows, the BAML data showed.

The inflows were broad-based across sectors and styles, with U.S. growth stocks attracting $3 billion and U.S. value equities $2.5 billion, the strongest inflows since March 2017.

U.S. stock markets <.SPX> have powered to record highs in December, also supported by robust economic data and falling unemployment.

BAML said that U.S. small business, manufacturing, homebuilders and consumer confidence were at their strongest in aggregate since the early 1980s, consistent with 5-6 percent U.S. real GDP growth.

Coupled with this, rate expectations remain extraordinarily low, with only 81 basis points of tightening from the U.S. Federal Reserve seen over the next three years, BAML said.

"(The) Big Risk remains the absence of Main St inflation inducing Wall St inflation (ie bubble), which in turn becomes a driver for a big tightening of financial conditions and volatility," the bank`s analysts said.

At its meeting this week, the Fed raised rates by a quarter a percent as expected, but expressed concerns about sluggish inflation, suggesting there was no need to accelerate the pace of increases. 

In total, global equities attracted $8.7 billion and global bonds pulled in $1.2 billion. BAML said this coincided with U.S. equities at an all-time high in November versus U.S. government bonds, exceeding the previous peak in December 1999.

Within fixed income, investment grade corporate bond funds remained in favour, attracting $2.7 billion, but high yield bonds saw outflows for a seventh straight week, losing $2.4 billion.

Emerging market debt funds also suffered their largest redemptions in 46 weeks, losing a modest $300 million.