Market rally underpinned by unprecedented inflows into equity funds

5 mins. to read


The following story, “Billions pumped into global equities” caught my eye in the Financial Times on Friday, highlighting the possibility that the great bull run in bonds may be coming to an end and the attendant liquidity that is likely to be released being invested in global equity markets. Though the evidence to date points to retail investors buying into managed funds rather than a heavy duty investment by institutional investors. It looks like U.S. and emerging market funds are proving particularly popular despite the apparent lack of bargains in this arena. Why are retail investors always last to the party?

With quantitative easing pushing Treasury bond yields to record lows in recent months and junk bond yields also at record lows, those seeking returns from bonds have seemingly hit a brick wall and with a real risk now that any hint of future inflation or further signs that the Federal Reserve is taking its foot off the peddle with regards to its asset purchases, giving rise to material risk that bond prices may now be on a downward curve and as we have been predicting at this magazine here for some months now.

After the strong equity market performance of 2012, retail investors appear to be increasingly frightened that they are being left behind and are now piling in, even as the market registers multi-year highs. The S&P 500 hit a 5 year high last week. US equity funds took in $18.3 billion in investment in the week ending January 9th, within this, mutual funds took in more than $7.5 billion – their largest inflow since the week ended May 2, 2001.

The focus next week will continue to be on the U.S. earnings season with results from the big banks and financials in focus – JP Morgan, American Express, Goldman Sachs, Bank of America and Citigroup. The shares of S&P 500 financial stocks increased on average by 26% in 2012. To sustain the 2013 rally, there’s little room for earnings to disappoint on the downside, with the real attention being placed on the outlook for the rest of the year.

For now, the market is indeed exuberant and sentiment is predominantly bullish with little sign that the late stage stampede to buy into equity funds will diminish any time soon. This was illustrated last week by the CBOE Volatility Index, known as the VIX, and  which fell to 13.36, the lowest level since June 2007. The gauge lost 3.4 percent for the week, following a 39 percent drop in the previous week, which was the biggest drop since the gauge’s creation over 20 years ago. For those with a more rational mindset….piling in with the crowd may not be the best advice – some profit taking would seem prudent in these circumstances. Still, these feeding frenzies often have a life of their own so the markets may yet go higher still before a more cautious stance returns. For market watchers a fascinating start to 2013.

Contrarian Investor UK

Investors this week poured the most money into equity funds in more than five years, as global shares surged and a compromise deal on the US fiscal cliff boosted confidence.

Net inflows into equity funds monitored by EPFR, the the funds research company, hit $22.2bn in the week to January 9 – the highest since September 2007 and the second highest since comparable data began in 1996. Record inflows into emerging market and world funds drove much of the expansion.

The figures capped a week during which global equity indices hit multiyear highs, encouraging speculation about a “great rotation” this year out of safe, recession proof assets such as government bonds and into equity markets.

“It has certainly got something of that look about it,” said Cameron Brandt, EPFR research director. “It is broadly based with strong flows into equities from retail investors and into actively managed funds. It has a different feel to it than other recent spikes in flows into equities.”

After a strong start to the year, the S&P 500 hit a five-year high this week, and erased modest losses to close unchanged, leaving it up 3.2 per cent so far this year. In London, the FTSE 100 ended the week at 6121.58, taking it to levels last reached in May 2008. Its 3.8 per cent surge over the first full trading week marked the best start of any year since 1999. The FTSE All-World index finished at 230.67, its highest level since May 2011.

Scepticism remains, however, about whether the latest shift into equities will be sustained. “It’s a bull dream so far, not reality,” said Jim Stride, head of UK equities at Axa Investment Managers. Adrian Cattley, European equity strategist at Citigroup, added: “Yes this is a good start to the year but we’ve seen this type of flow into equities before in January.”

In the US, investors are looking ahead to company earnings next week, while Washington has yet to raise the Federal debt ceiling and address planned spending cuts that could weigh on the economy this year. “Investors are over-optimistic on earnings and we think the debt and fiscal issues could come back to bite the market hard,” said Michael Kastner, principal at Halyard Asset Management.

EPFR’s latest weekly figures showed a net $7.4bn inflow into emerging market equity funds and $3.4bn into world equity funds. Inflows into US equity funds, at $10.4bn, were at a six-week high. Europe equity inflows were more modest, at less than $1bn.

Investors are over-optimistic on earnings and we think the debt and fiscal issues could come back to bite the market hard – Michael Kastner, Halyard Asset Management

Separately, Thomson Reuters’ Lipper service reported US equity funds, including exchange traded funds, took in $18.3bn in the week to January 9 – the fourth-strongest figure since it began calculating weekly flows in 1992.

The strong figures from Lipper come in the wake of the compromise deal that avoided the so-called US fiscal cliff – billions of dollars’ worth of tax cuts and spending hikes that were due to automatically kick in at the start of the year. The new budget passed by Congress increased taxes for richer Americans and extended unemployment benefits, but delayed a decision on planned spending cuts for two months.

According to the UK’s Investment Management Association, net retail sales of equity funds hit £720m in November – the highest since April 2011 – making shares the most popular asset class for investors for the third month in a row. By contrast, fixed income funds sales were the lowest since October 2008.


Comments (0)

Leave a Reply

Your email address will not be published. Required fields are marked *