Cherry Reynard examines whether the global equity rally can be sustained...
The S&P 500 is up more than 8% since the start of the year, with the FTSE 100 just a touch behind, and European markets just a touch ahead. So far, the move into equity has largely come from cash reserves.
With this in mind, there are now two main questions for investors: will money start to exit fixed income to be redeployed into equity? And will this help to sustain the equity market rally?
Although the early months of 2013 have seen a clear move into risk assets, particularly equity, this rotation has not been accompanied by a commensurate move out of fixed income.
Cherry Reynard assesses where the smart money was invested in February
This is in spite of the concerns on fixed income valuations. Analysts have suggested that the ‘great rotation’ will not have legs until investors begin to sell out of bonds.
At the tail-end of February, there were signs that this was starting to happen. In the week to 13 February, investors pulled money from US junk bond funds for a third consecutive week with mutual funds and ETFs exposed to the sector seeing outflows of $329m, according to EPFR Global.
A spike in issuance and yields of, in many cases, just 4.5%-5% have spooked investors, and the sector has now seen a total outflow of $1.7bn since late January.
However, other parts of the fixed income market – where concerns over valuation levels are arguably greater – have continued to see inflows. Bond funds worldwide pulled in $1.1bn in new money over the week to 6 February.
This may be a slow-down in the growth rate, but flows do not yet suggest that investors are concerned about a reversal in the bond market in the short-term.
Most analysts now believe only a change in perception on interest rates will lead investors out of bonds and, with economic growth still weak, the consensus is that interest rates will stay low.
The most popular area was emerging market bond funds, with inflows of $1.3bn, showing investors have not entirely lost their appetite for fixed income risk.
On the equities side, investors continue to favour emerging markets over developed markets, directing $3.4bn into emerging market funds. This formed over half of the total $6.6bn that went into equity funds.
In Europe, Morningstar data shows all asset classes enjoyed sizeable inflows during the month. Equity flows of €16.9bn were higher than they have been in a year, but there were still no signs of any move out of fixed income, which saw inflows of €18.5bn.
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