Forget the “great rotation” out of bonds into stocks: 6 months into the so-called reflation trade, which so many strategists predicted would unleash a new era of euphoric stock buying driven by bond sales, it just isn’t happening; in fact bonds have seen fund inflows on 17 of the last 18 weeks. Instead, two other “great rotations” have emerged: one out of “active management” into passive, or hedge funds to ETFs, while the other – more recent one – is out of various asset classes and into Europe. It was this last rotation that was on display in the past week, when Europe saw the biggest inflows – approximately $2.4 billion – since December 2015, and the 5th consecutive week of inflows in a row.
This is likely just the beginning: as DB observes overnight, “There is a wall of money just waiting to come into Europe”, as fund flows into Europe lagged other developed markets in 2016.
There were other notable observations in the latest weekly EPFR fund flow report. In addition to the surge in European inflows, a total of $21 billion was allocated to equities, the most since the US election on hopes Trump’s “tremendous” tax proposal could boost risk assets; instead it was a dud. The US alone saw $13.8bn in inflows, the largest inflows in 19 weeks.
Once again, there was bad news for active managers: of the $21 billion in equity inflows, $21.6 billion went to ETFs, which means that mutual funds suffered another $0.5 billion in outflows.If even on near record inflow weeks, the active community can’t catch a bid, it may be time to start thinking career alternatives. On a YTD basis, ETFs have seen $167 billion in inflows, offset by $45 billion in mutual fund outflows.
Some more observations on the latest fund flows, via BofA:
- Flows this week: show marked shift back to Joe Six Pack theme (link); $21bn inflows to equities, $10.9bn inflows to bonds, $0.2bn inflows to gold.
- Inflows: renewed tax reform hope causes largest equity inflows since the US election (Chart 2); biggest inflows to European equities since Dec’15 ($2.4bn – Chart 3) after market-friendly French election; inflows to financials, tech, energy, US small caps
- Outflows: defensive outflows from REITs, consumer, utilities, telcos
Broken down by region, style and sector:
- US: largest inflows in 19 weeks ($13.8)
- EM: 6 straight weeks of inflows ($1.8bn)
- Japan: inflows 14 of past 16 weeks ($0.8bn)
- Europe: 5th straight week of inflows, largest since Dec’15 ($2.4bn)
- By style: US value fund outflows 5 of past 6 weeks ($0.6bn), inflows to US growth funds ($0.4bn); largest inflows to US small caps in 23 weeks ($4.0bn)
- By sector: inflows to tech ($0.2bn, 8 straight weeks), financials ($1.2bn, largest in 7 weeks), energy ($0.2bn), healthcare ($0.1bn); outflows from materials ($0.9bn, 3 straight weeks), real estate ($0.2bn), consumer ($0.1bn), utilities ($0.2bn), telcos ($0.1bn)
With that in mind, it may be now too late to jump into the European stock market euphoria. In a note by Deutsche’s Sebastian Raedler, the great money inflow is coming just as the strong European economic data starts to revert back to the mean:
We have started to see a pull-back already with the April flash-implied level of 53.7 down from 54.3 in January. Of more concern for asset prices is the sharp fading in momentum, with the 6-month change in the global PMIs, a key driver of European equity price momentum, down from +2.5pts in January to just +0.6pts in April if the flash readings are confirmed.
DB’s warning: “The 6-month change will be negative by June even if the April flash-implied level of 53.7 holds, which would be consistent with negative equity price momentum.”