It’s always an open question whether flows follow performance or vice versa, but the prospect of relative US equities underperformance almost surely contributed to outflows during 2023’s opening months.
I touched on this last week, but it’s worth noting that outflows from US equity funds are ongoing.
Another $2.2 billion fled US-focused funds during the latest weekly reporting period, bringing the YTD exodus to more than $17 billion.
Over the same stretch, inflows resumed to European and emerging market stock funds, with the latter holding on despite a second weekly outflow from Chinese equities.
As discussed in the linked article above, the flows disparity in 2023 is in part attributable to a macro narrative that ostensibly favored rest-of-world exposure. Optimism around the European and Chinese economies, as well as expectations for a weaker dollar tied to an assumed US downturn and a less aggressive Fed, all favored an RoW lean.
The fate of those macro assumptions hangs in the balance. The US economy is firing on most, if not all, cylinders according to data some don’t trust, while the Chinese economy is still poised for improvement which’ll manifest in data nobody trusts. Europe continues to surprise, even as some argue the outlook for the region has virtually never been more tenuous. As for the weaker dollar story, that took a hit this month from the hawkish repricing in the US rates complex.
But it’s more than any macro narrative or, I should put it this way: Last year’s macro narrative and the associated policy response from the Fed made USD cash viable for the first time in more than a dozen years, and that’s surely eroding the appeal of equities.
“‘There is an alternative’ continues to challenge the past decade’s muscle memory, where the ability to park your money in a six-month bill for ~5.00% and sleep comfortably at night is clearly offering a challenge to the perpetual motion machine that had been ‘US equities inflows’ in years past,” Nomura’s Charlie McElligott said Tuesday.
The chart on the left uses the same EPFR data, only it shows rolling three-month flows. Charlie described it as “yikes.”
Meanwhile, he observed, “last week showed the first signs of definitive real money selling of US equities that we’ve seen YTD, with large lots in our S&P futures imbalance monitor showing persistent trade pressure, hitting the bid-side in all-day, VWAP-style selling flows.”
Consider how far we’ve come: USD cash as a high-yielding safe haven is the polar opposite of the perverse dynamic that persisted in August of 2019, when some junk bonds in Europe sported negative yields. Less than four years later, an asset with no credit or duration risk yields 5%.
