‘Dramatic re-rating of the US at the expense of other markets’
director of research at EPFR, gives an insight into how big money has moved across geographies and asset classes over the past few months and the road ahead for flows, during an interview with Puneet Wadhwa. Edited excerpts:
Where has the global big money flown to thus far in 2021?
Coming into 2021, investors were looking at Asia to lead the global rebound. Between December 2020 and the end of January 2021, they pulled $55 billion from Epfr-tracked European and North American equity fund groups, while steering over $18 billion into Asia Pacific and Asia ex-japan equity funds. Since the beginning of the second quarter, however, over $36 billion has flowed into North American and European equity funds compared to just $2 billion for all Asian groups.
This shift reflects the sheer volume of fiscal stimulus in the US and the impact that is expected to have on economic growth and asset values in the world’s largest economy. With two key Senate races in a traditionally Republican state still undecided early in the New Year, few thought the new administration would be in a position to push through the stimulus package it has. So, there’s been a dramatic re-rating of the US at the expense of almost every other market.
In recent weeks, there has been more interest in Europe equity and bond funds as investors position themselves in anticipation that this region’s delayed recovery will start in earnest by the end
How are investors viewing India as an investment destination?
The eye-popping surge in Covid cases has certainly knocked a modest rebound in flows to India equity funds on the head. But mutual fund investors were already treating India’s reflation story, and the official data underpinning it, with some caution. Infections during the first wave peaked in mid-september but dedicated India equity funds did not see flows rebound until well into the first quarter of 2021.
Of late, the Indian markets have somewhat decoupled from global peers. Do you see a reversal in this trend any time soon?
I think it is quite likely to persist. India’s large domestic market, relative lack of dependence on exports, the role remittance flows plays in domestic demand, and the percentage of the working population still tied to agriculture mean that it has always walked to its own beat. The surge in Covid cases magnifies that separation.
As regards India, what is spooking foreign institutional investors (FIIS)? The jump in new Covid cases is the immediate cause, with knock-on effects in terms of foreign perceptions that Prime Minister Narendra Modi may be losing too much political capital as a result and cannot be counted on to pursue meaningful structural reforms. But the most recent International Monetary Fund (IMF) forecast still predicts double-digit economic growth this year, so the potential for a rebound in foreign interest is still there.
Do you expect the pace of outflow in gold exchange-traded funds to gather steam over the next few quarters?
It looks to us as if those outflows are another reflection of the broad scepticism surrounding the Fed’s inflation narrative. Why hold gold if the Fed’s hand is forced and it raises rates sooner rather than later? But, if the Fed sticks to that narrative, the combination of inflation hedging and increased industrial demand will likely pull investors back into this asset class.
Is the risk-reward favourable in debt funds from a one-year perspective?
The risk-reward equation looks very unfavourable, except when you compare that the equation’s results with those of the alternatives. The bond funds we track have already absorbed over $300 billion so far this year; so, it is clear that many investors can still stomach the current balance between risk and reward.
How have commodity-related funds performed in terms of flows?
THE EYE-POPPING SURGE IN COVID CASES HAS CERTAINLY KNOCKED A MODEST REBOUND IN FLOWS TO INDIA EQUITY FUNDS ON THE HEAD”
The combination of rebounding economic activity, concerns about inflation, and a tight supply picture have boosted commodities sector funds. Their latest inflow was the 26th in the past 28 weeks. Copper and iron ore prices have climbed to fresh record highs this year; corn prices are up some 40 per cent YTD and pork prices are up a similar amount.
Energy funds are enjoying similar levels of interest. Through the first week of May, this group has posted only one weekly outflow since the beginning of the December 2020 quarter. The ongoing policy support for alternative energy has certainly been a factor. Three of the six funds recording the biggest inflows for the final week of April have clean energy or solar mandates.
S&P Dow Jones has introduced cryptocurrency indices. Do you see incremental money flowing into them as compared to traditional investment avenues?
We’ve seen a big jump in flows to cryptocurrency funds, but those remain a very small part of the overall mutual fund universe. As to future demand, a lot depends on whether, and to what degree, national governments and central banks get into this field.