Whether it is due to the recent speculation that Japan may usher in helicopter money, or ongoing concerns about what Brexit may do to the future of European asset returns, there has been a dramatic shift in fund allocation and as Bank of America reports, investors are rushing to vote with their wallets. They have done so in the latest week by continuing to plow money into EM stocks, allocating a record amount of cash to Emerging Markets, while yanking a similarly record amount of cash from Europe.
As BofA’s Michael Hartnett reports, there was a record inflow to EM debt funds ($4.9bn); representing the largest EM equity inflows in 12 months ($4.7bn).
The reason: “investors furiously chasing carry in EM debt markets, happily assuming every interest rate in the world will fall to zero, as well as capitulating into “weak $” winners (note how inflows to EM equities starting to play catch-up to monster inflows this year first to gold (Chart 3), & more recently, EM debt (Chart 4).”
However, this euphoria into EM is not widespread. On the contrary, when it comes to European stocks, BofA reports that YTD neither ECB nor BoJ QE has thus far moved needle on flows. The result has been a record redemptions from European equity funds this week ($6.1bn), as well as an exodus from Japan ETF’s (-42% AUM YTD).
As BofA reported previously, in July BofAML’s Fund Manager Survey showed a first Eurozone UW in 3 years & biggest Japan UW in more than 3 years.
Some other big picture observations on fund flows:
Asset Class Flows:
- Equities: $6.2bn outflows (note divergence between $3.6bn ETF inflows & $9.8bn mutual fund outflows)
- Bonds: $1.8bn inflows (inflows in 14 of past 16 weeks)
- Precious metals: $0.4bn inflows (smallest in 8 weeks) (inflows in 26 of past 28 weeks)
Equity Flows
- EM: largest inflows in 12 months ($4.7bn) (all via global EM funds)
- Europe: record outflows ($6.2bn) ($24 straight weeks of outflows)
- Japan: $1.1bn outflows (largest in 12 weeks)
- US: modest $2.7bn outflows
- By sector: largest financials inflows since Dec’15 ($0.8bn); inflows to REITs funds in 4 of past 5 weeks ($0.6bn); outflows from tech funds in 4 of past 5 weeks ($0.6bn)
Fixed Income Flows
- $2.1bn inflows to HY bond funds (3 straight weeks)
- $5.2bn outflows from IG bond funds (caveat: data skewed by big $8.1bn outflows from Prudential Core Ultra Short Bond Fund)
- 44 straight weeks of inflows to Munis ($0.9bn)
- $1.4bn outflows from Govt/Treasury funds (largest in 15 weeks)
By sector: largest financials inflows since Dec’15 ($0.8bn); inflows to REITs funds in 4 of past 5 weeks ($0.6bn); outflows from tech funds in 4 of past 5 weeks ($0.6bn)
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Finally, some big picture ideas from BofA on how to make sense of all of this:
- The Big Pain Trade: BofAML FMS, flows, performance say biggest “pain trade” = long Banks, short Bonds…note this week’s flow reversal into both asset classes…largest financials inflows since 2015 ($0.8bn)…largest outflows from Treasuries in 15 weeks ($1.4bn). Summer contrarian pain trade = long EU stocks, short EM debt.
- Quantitative Flow Failure: YTD neither ECB nor BoJ QE has thus far moved needle on flows…record redemptions from European equity funds this week ($6.1bn)…BofAML GWIM data show exodus from Japan ETF’s (-42% AUM YTD)…July BofAML FMS shows first Eurozone UW in 3 years & biggest Japan UW in more than 3 years.
- Big Pain Trade Catalysts: catalysts for mean reversion of epic 2016 outperformance of bonds (Treasuries & EM debt) over banks (in Europe & Japan): 1. strong US consumer/housing data allowing Fed to hint it is not “one & done”, 2. EU/ECB bank policy moves allow markets to anticipate Italy bank resolution, 3. a >¥15-20tn Japan fiscal stimulus announcement comes with implicit BoJ helicopter.
- Big Japan fiscal stimulus = +ve Nikkei: Table 1 shows dates, size of 10 largest Japan fiscal stimulus packages since 1990; average size = 3.4% of GDP; fiscal stimulus often enacted after stocks down big prior 6 months; stocks rally 1 month ahead of fiscal announcement, pause in weeks after package announced, then rally in subsequent months; meanwhile Japanese yen tends to strengthen after the policy announcement; a >¥15-20tn Japan fiscal stimulus announcement in coming weeks financed with implicit BoJ helicopter money would help keep risk rally alive until Labor Day.
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