Peaklight

Our Chief Global Cross-Asset Strategist, Serena Tang, explains where funds are moving across global markets currently, and why it matters to investors.

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Welcome to Thoughts on the Market. I’m Serena Tang, Morgan Stanley’s Chief Cross-Asset Strategist. Along with my colleagues bringing you a variety of perspectives, today I’ll dig into the concept of fund flows, how they shape global markets and why they matter to investors. 

It’s Thursday, August 1, at 10am in New York. 

Finance industry professionals often use the term “flows” when looking at where investors are, in the aggregate, moving their money. It refers to net movements of cash in and out of investment vehicles such as mutual funds and exchange-traded funds, or in and out of whole markets. By looking at flows, investors can get a good sense of where market winds are blowing and, essentially, where demand is at any given moment. Now, whether you’re a retail or institutional investor, having a perspective on market sentiment and demand are powerful tools. So today I’m going to give you a snapshot of some key flows, which should give a sense of demand and the mood right now; and what it means for investors.

First of all, despite the recent rally in global equities year-to-date, we've yet to see an investor rotation, or portfolio realignment, from bonds to stocks. Flows into bonds are still leading flows into stocks by a pretty large margin. And unless stocks cheapen materially, we don’t expect this trend to reverse anytime soon. In addition, fund flows into large-cap equities still dwarf those into small-caps year-to-date. Although we saw a brief reversal of this trend in June, large caps flows have swung back to prominence. 

We do see hints of sector rotation within equities, as investors shift to what they see as more promising stocks; but it’s not a clean or entirely unambiguous story. The Science & Tech sectors – which saw a notable drop-off in flows from the first to the second quarter of this year – still lead year-to-date; and flows represent nearly a third into all flows into equities. More cyclical sectors like Basic Materials and Financials attracted more capital than in the first and second quarter, while defensive sectors such as Consumer Goods saw a softening of outflows compared to the same period. 

From a global perspective, we also look at flows in and out of particular regions or markets. So, year-to-date, US stocks received about US$43 billion in net inflows while rest-of-world stocks saw about US$15 billion in net outflows. Now, there were some exceptions – with India, Korea, and Taiwan leading – seeing significant inflows year-to-date. 

We look at flows within categories too, so within fixed income, for example, we are seeing flows toward less risky assets; revealing what we call a risk-off preference. Higher quality, Investment Grade funds – raked in about US$92 billion in net inflows year-to-date, while US treasuries saw only at US$25 billion. That Treasury number is actually significantly higher than what we saw from the first quarter to the second quarter, while inflows to High Yield and low-quality Investment Grade corporates have slowed compared to the start of the year.