Investors are continuing to flock to fixed income assets but are shunning stocks, particularly in Europe.
That’s the finding of Bank of America-Merrill Lynch’s (BAML) European credit strategy team, comprising of Ioannis Angelakis, Barnaby Martin and Souheir Asba, who have put together this nifty chart below that shows fund flows into various asset classes so far in 2016, looking at both the cumulative flows as well as the average weekly movement.
There’s a clear trend with funds moving from stocks and high-yield credit into government, emerging market and high-grade corporate debt, along with commodities, with BAML putting the divergence down to the effects of additional quantitative easing from the European Central Bank announced in March.
The trend seems to be set for the rest of the year, with inflows into QE assets – fixed income – remaining positive for the eighth week in a row. Evidence of the impact of central banks purchases is hard to ignore. Over 90% of the ~$40bn that coasted into fixed income year to date was added during the last two months (July & August). High grade funds in particular recorded a strong path of inflow since the announcement of QE back in March, but the start of the purchase (8th of June) increased the inflows dramatically.
QE, helping to diminish market volatility associated with concerns surrounding the Chinese economy earlier this year, is pushing investors into asset classes that are being targeted by the ECB, helping these assets to outperform despite increasingly low yields on offer.
According to BAML, high grade credit saw their 24th week of inflows last week, with the pace doubling from the level seen a week earlier.
BAML also notes that interest in emerging market debt is also robust, attracting inflows for the eighth consecutive week. It’s currently attracted the most funds year to date, quite a performance considering emerging markets were at the epicentre of investor concerns at the start of 2016.
At the other end of the spectrum, BAML notes that “European equity funds continued adding to their longest recorded stream of outflows
according to EPFR data, now standing at 29 consecutive weeks”.
Commodities flows also weakened, falling for the first time in 18 weeks.
While diminishing returns in fixed income markets may help to spur on interest in higher-yielding, riskier asset classes, it’s clear that many investors aren’t willing to take on that risk, nor fight the actions of central banks as yet.
The chart below from BAML tracks fund flows into global stock funds going back to 2012. Despite outflows slowing in recent weeks, stocks remain on the nose right now.