The EPFR Exchange Podcast

Bond Funds boosted & Sector Funds replenished

January 18, 2023 Kirsten Longbottom & Cameron Brandt
The EPFR Exchange Podcast
Bond Funds boosted & Sector Funds replenished
Show Notes Transcript

A mixed batch of macroeconomic data and guidance from earnings reports gave Bond Funds a boost despite it hard to find investors’ optimistic at large. Falling inflation, feeling of tightening doing its job to check economic activity and the selloff of bonds last year has helped this asset class in the start of 2023. The band that the Bank of Japan is using to try and control 10-year Japanese Government Bond issues has markets tense and investors feeling it doesn’t reflect global reality. Meanwhile, Cam talks about a somewhat improved outlook for Europe Equity compared to that in 4Q22, touching on natural gas usage, Russia’s supply and an unusually warm winter. And Kirsten carries that over into an overview of Sector Funds, which saw Consumer Goods and Industrials benefit while Technology Sector Funds suffer. 

00:00
This is the EPFR Exchange Podcast. All opinions expressed by Cam, Kirsten or our podcast guests are solely of their own opinion and do not reflect the opinion of EPFR, part of private equity Montagu's portfolio of stand-alone companies. This podcast is for informational purposes only and should not be relied upon for investment decisions.

00:20
Kirsten Longbottom
Hello everyone and welcome to the EPFR Exchange Podcast! My name is Kirsten Longbottom and I'm joined by EPFR's resident economist Cameron Brandt. We'll walk you through the latest world news and how that relates to the data that EPFR tracks of Mutual Funds and ETFs. Cam, another good week,  almost in mid-January can't believe it. How's the weather up there lately?

00:47
Cameron Brandt
Not what you would expect of New England at this time of year. While you always have to worry about climate change, there's a bit of me that looks at my energy bills and thinks "that wasn't so bad". Something that I think is even more of a factor for Europeans at the moment.

01:12
Kirsten Longbottom
Definitely, I think we'll get to that a little bit later but down here in Texas we did have a day where we hit 80° it was quite nice. So in the latest week, December CPI reporting closed out the first full week of data in January, showing US inflation at 6.45% compared to the 7.1% to almost 9.1% we experienced from June to November. What else has helped Bond Funds convince investors to commit the most money since the third quarter of 2021 this week?

01:51
Cameron Brandt
Well, certainly the inflation readings both here and in the eurozone encouraged those who are hoping for earlier than currently expected pivots from tightening to the very least neutral if not an easing bias on the part of the US Federal Reserve and the European Central Bank. What also gave that scenario boost was generally pretty mixed macroeconomic data and the guidance coming out of the first batch of major earnings reports. It's hard to find anyone who is particularly optimistic, certainly about the first half of this year. The World Bank recently weighed in by sort of cutting its global growth forecast by almost half and we've been seeing corporate guidance certainly dishing out a dose of conservative reality. So I think combined with the falling inflation, the feeling that the tightening that's occurred so far really is checking economic activity, and the fact that bonds sold off so much last year, really encouraged investors to move back into that asset class.

03:32
Kirsten Longbottom
And so kind of recently we've seen a lot of companies cutting employees or laying off people. How would that and kind of influence investors' decisions in the upcoming weeks? I know you kind of briefly touched on it.

03:49
Cameron Brandt
Well you know, in aggregate it's a bearish indicator. But at sort of some of the sectors and individual company levels, it may well ignite some more interest. We'll have to see what our Stock Flows level data come up with within the next few weeks but there's certainly been a narrative towards the end of last year that certain sectors of the US and indeed parts of Europe had been hoarding labor, a lesson learned from a previous crisis. And technology just because there'd been so much capital flowing into it, they could-- staffing up did not cause any great problems. So I think as long as the cost-cutting and workforce trimming is judicious, that it may actually help US and European Equities move higher sooner than it was perhaps expected.

05:12
Kirsten Longbottom
Continuing with the central bank talk, ahead of the Bank of Japan's first policy meeting of 2023, on Tuesday next week. What are investors expecting and how is that shaping the way they approach Japan Equity Funds?

05:28
Cameron Brandt
Well, the Bank of Japan has a very well-established track record of trying not to give investors what they're expecting. And currently they're in markets so there's definitely some tension with markets feeling that the band that they are trying to control the 10-year Japanese Government Bond issues at just doesn't reflect global reality. The BoJ has already blinked one and raised the band. But issues with slightly shorter duration than 10-years which is the one they're trying to control are now moving higher - yields on them are moving higher than the 10-year which is not an ideal yield curve. So there's definitely anticipation that the Bank of Japan could take another step towards normalizing monetary policy while accepting that they actually get to normal monetary policy still has many miles to go. There's obviously also a changing of the guard later this year when the long-serving Head of the Bank of Japan steps down. So there's definitely considerable uncertainty at the moment surrounding what has been certainly over the past 7 to 8 years, perhaps the most reliably accommodative monetary policy pursued by any of the major central banks. That has obvious implications for Japan, they've already seen their currency firm a bit which is not a bad outcome. It hasn't firmed so much it hurts their exporters but it does take some of the stings out of imported dollar-denominated commodities. But the wrinkle that is starting to attract some attention is that while rates were so low Japanese investors looked overseas and in addition to the US they've built up fairly healthy stocks of European debt, Italy and France especially. If the Bank of Japan lifts the yield cap on the 10-year JGB much higher, it'll start to make sense after hedging costs for Japanese investors to repatriate-- sell up and repatriate some of those offshore holdings which could be an unwelcome jolt for European sovereign debt markets in the months ahead. So basically, markets and investors are trying to gauge a scenario that has sort of been off the table for so long. There's sort of a catch-up feel to how people are dressing and talking about it.

08:50
Kirsten Longbottom
A few single-country Bond Funds among the developed-Europe space profited this week with all groups showing inflows at multi-week highs. UK, Switzerland, Denmark and Greece. Switzerland equity, too, saw its biggest inflow in six months, Germany Equity inflows were the highest since the first quarter of 2021, while UK Equity took a tumble after two positive weeks. An unusually warm winter has put a squeeze on energy while recently windy conditions have helped energy-- renewable energy make sweeping positive results in the UK, breaking records for wind power as well. What's the energy and Europe picture?

09:36
Cameron Brandt
Well, I think what you mentioned in terms of flows into some of those funds is tied to the fact that this winter, certainly from an energy and energy cost perspective, has not been as brutal as people feared it might be. It's been a very warm winter so gas natural gas usage has not really stressed the stored supplies and markets have adapted pretty quickly to the shutting off of Russian taps to Europe. So the outlook for Europe is somewhat improved from where it was going into the winter. You know it remains probably the corner of the economic world or certainly the developed economic world with the greatest headwinds and what was it? The 47th straight week of redemptions from Europe Equity Funds despite as you noted better flows into dedicated Germany and Switzerland Equity Funds. So there's definitely some value there in the eyes of investors but there's also still considerable risks attached to positioning yourself to realize that value. So I think we will sort of see increasing interest in Developed-Europe over the next few months but I think flows in and out of funds while probably on a rising trend will be pretty choppy.

11:24
Kirsten Longbottom
That makes sense, I think that trickles along into Sector Funds a little bit this week.

11:30
Cameron Brandt
You dug into that a bit and I was interested that both Industrial and Consumer Goods Sector Funds had better than has been the case week. And then there was sort of more grief in the Technology arena. Can you tell us a bit about what you did see?

11:57
Kirsten Longbottom
Yeah, I guess I'll start with the positive notes. We did see six groups post inflows this week, four of which were the same as last week and we did see five groups post outflows. US Equity drove flows positive for both Consumer Goods, the users, and Industrial Sector Funds, the makers of the goods. Despite China Equity posting an overall outflow in the latest week, we did see Consumer Goods Sector Funds dedicated to China absorb some fresh cash in the latest week. US tech didn't do as well. The heaviest redemption in nine weeks of over $1 billion dragged the overall headline number down further. I think investors were focused on the latest earnings from Taiwan's largest semiconductor manufacturer. They did beat earnings but missed revenue estimates and they attributed that to weaker consumer demand. The pandemic kickstarted a major movement for working from home and as a result, electronics were in very high demand and I think that was when we experienced a chip shortage and now having recovered, the need from [consumers] for electronics I think is dimming or coming to an end and they did point towards those signs. Today we did see a few big companies like Delta and UnitedHealth, and various major banks report, so we may expect the numbers to reflect some of what was talked about in those earnings in the upcoming week. But I do plan to also somewhat dive into Aerospace & Defense Funds which came under Industrials because four funds dedicated to aerospace and defense appeared in the top 10 funds reporting inflows for Industrials. So that may be a connection to the Russia-Ukraine conflict, not too sure of the angle but that's a good focus. 

14:00
Cameron Brandt
And perhaps to end I should pick up on your mention of Covid and China. In the coming weeks, we have the Chinese Lunar New Year, a big holiday there. Even in normal times the economic data screens go fairly blank for a couple of weeks but this year has the added focus of what this huge move home and back will do to the Covid epidemic/pandemic that is sweeping through China at the moment. And that obviously has implications for when the much-anticipated rebound for the Chinese economy will take place. So I imagine we'll be watching that, watching how the flows react to whatever news comes out of China during the next few weeks.

15:12
Kirsten Longbottom
Yeah, absolutely couldn't agree more! Well, thank you Cam for joining us again on Friday and we'll check back next week.

15:21
Cameron Brandt
Yupp, as we move from the Year of the Tiger into the Year of the Rabbit. 

15:26
Kirsten Longbottom
Woo! We'll have to dive into the meaning of those sometime. Alright, bye!

15:32
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