"Massive Buying Of Deflation Winners": Traders Position For End Of Rate Hikes
In the week in which the S&P hit 4 consecutive record highs, investors were just as giddy and according to EPFR, allocated $7.6bn into equities ($12.6bn in ETF inflows offset by $4.9bn in ETF outflows) - the biggest inflows in 11 weeks - and $0.8bn into bonds, while pulling another $0.3bn out of gold, the 5th straight week of outflows.
Despite the rout in EM, investors remain optimistic the sector, and according to BofA's Michael Hartnett there is no sign of EM equity ($0.4bn inflows) & debt ($0.1bn inflows) flow capitulation despite fresh sell-off in EM FX…BRL >4, TRY >6.5. This is surprising in light of the recent steep selloffs in EM equity and bond ETFs, the latter of which recently dropped to levels last seen in 2003.
The perplexing EM euphoria remains a sharp contrast to the EU, where recent the EURUSD rally has failed to stem to stem tide of redemptions, with another $0.2bn pulled out of Europe this week, resulting in 25 consecutive weeks of outflows amounting to -$57bn. Below is a detailed breakdown of flows by region, style and sector:
- US: biggest inflows in 11 weeks ($7.2bn)
- Japan: small outflows ($0.2bn)
- Europe: 25th straight week of outflows ($0.2bn)
- EM: small inflows ($0.4bn)
- By style: inflows to US large cap ($3.8bn), US growth ($1.3bn), US small cap ($1.2bn), US value ($0.1bn)
- By sector: inflows tech ($1.2bn), healthcare ($1.1bn), consumer ($0.8bn), materials ($0.1bn), utilities ($0.1bn); outflows financials ($0.2bn), energy ($0.3bn), real estate ($0.9bn)
Meanwhile, despite some concerns about the resiliency of the bond market, Hartnett notes that "inflows into IG corp ($0.3bn) & HY corp ($0.4bn) are further evidence of recovery in credit markets over past few months." The full breakdown of flows into fixed income is shown below:
- IG bond fund inflows 9 of past 10 weeks ($0.3bn)
- HY bond inflows 4 of past 5 weeks ($0.4bn)
- Tiny EM debt inflows ($0.1bn)
- Small muni fund inflows ($0.1bn)
- Modest Govt/Tsy outflows ($0.6bn)
- First TIPS inflows for 6 weeks ($0.2bn)
- Bank loan fund inflows 26 of past 27 weeks ($0.3bn)
Finally, in terms of overall flow patterns, BofA observes that just as core PCE hit the Fed's target of 2.0% for the first time since April 2012, investors are already preparing for the deflationary market (i.e. an end to rate hikes) with massive buying of deflation winners, e.g. tech ($1.2bn) & healthcare ($1.1bn, biggest in 18 months), and redemptions from inflation winners, e.g. financials (-$0.2bn) & energy (- $0.2b – chart 1);
For those keep an eye on the value vs growth divergence, BofA notes that MSCI global Growth vs. Value has hit new YTD highs, and is now just 7% from the pre "dot-com", 1999 peak.
Finally, BofA's "total return quilt" shows that 2018 YTD returns are as follows: commodities 6.6%, stocks 4.6%, US$ 2.7%, cash 1.1%, high yield -0.1%, government bonds -1.4%, investment grade -2.4%.