The EPFR Exchange Podcast

Discounting ECB and Fed’s hawkish anti-inflation rhetoric & positioning for post-zero Covid rebound

January 23, 2023 Kirsten Longbottom & Cameron Brandt
The EPFR Exchange Podcast
Discounting ECB and Fed’s hawkish anti-inflation rhetoric & positioning for post-zero Covid rebound
Show Notes Transcript

Cam and Kirsten talk about how investors steered large sums into Bond Funds dedicated to the US and Europe while exiting Inflation-Protected Bond Funds, and showed optimism about China’s post-Covid despite the recent rise in case numbers. Listen in for more on Emerging Markets, Europe Equity and Bonds, and China Sector Funds.

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.

00:21
Kirsten Longbottom
Hello everyone and welcome to the EPFR Exchange Podcast! My name is Kirsten Longbottom and we are joined by EPFR's resident economist Cameron Brandt. Each week we get together to talk about themes and trends dominating the financial landscape and reflect on Mutual Funds and ETF Flow and Allocations data tracked by EPFR. Cam, we've hit the three-week countdown to our company's SKO meeting in Mexico. What are you most excited about besides the obvious?

00:53
Cameron Brandt
Well I assume by the obvious you mean the chance to harass new and different fish species. But no I'm looking forward to gathering as a standalone company for the first time in over a decade. We were in the Informa family since I think it was 2010 and while informa was a very good parent, we did have to march somewhat to the beat of their drum and in a-- operating in the financial world which is seemingly changing and dealing with fresh challenges almost week-by-week at the moment, you know this ability to kind of set our own pace, focus on what we think is important, is something I'm looking forward to. But this will be a chance to see if other members of EPFR are as excited or if they're excited about different aspects of our new incarnation and obviously you'll be interviewing I think next week our CEO Todd Willitts about his vision and how he sees our evolution in the next year and beyond.

02:09
Kirsten Longbottom
Yeah, definitely. Some exciting times for EPFR and yeah, we look forward to hear from Todd next week. So energy, China, Covid, inflation, recession, earnings, job layoffs, the Russia-Ukraine conflict. I could go on and on about headwinds facing major economies at the moment or for quite some time now. What do you think is the most influential to investors? Are we seeing them react strongly to something specific?

02:42
Cameron Brandt
Well I think to me the most important thing going on is that the markets are certainly discounting this still pretty hawkish anti-inflation rhetoric coming out of the Fed and the ECB. They're steering pretty large sums into Bond Funds dedicated to the US and Europe. Certainly in the case of the US, that money is not going to Inflation Protected Funds. So there is certainly a sense that the Fed is talking about something that has already rolled over and time to position for what comes next. There's always a risk to fighting the Fed and I do think that we could actually see a bit more volatility in bond markets this year. I continue to be surprised at how little attention the running down of the Fed's balance sheet is getting and the European Central Banks pledge to start doing that themselves in March of this year. But you know optimism is always interesting. And saw that last week more specifically in the case of China. Last year, certainly in the second half, we saw a lot of money positioning itself for the post-zero Covid rebound. Last week, those flows faltered as people looked at the Covid numbers in China. But a combination of credible official reports that while the numbers are pretty shocking, they are close to peak. And sort of a warmer fuzzier tone from some senior chinese officials about actually wanting foreign capital and seeing themselves as a partner in the global economy, I think have sort of encouraged people to add more to their bet that there's going to be a strong rebound in the second half of the year. Those inflows were actually all the more interesting because this is historically a period of the year when people take a step back from China because of the so two-year Lunar Year holiday. In the past, the step back was because a lot of the key economic data points go radio silent or much are muted by sort of the lack of economic activity. But this year, there's obviously another kind of variable which is, is this going to be one of the biggest super spreader events in history? But I think people feel you know that the rubicon has been crossed and even if there is a few more bumps in the road for China, the basic story is going to be a steady downward slope for the Covid cases and a steady reopening of the economy that will really kind of start to move the needle in growth terms, certainly by the third quarter.

06:04
Kirsten Longbottom
Yeah, and that helped Emerging Markets both on the Bond and Equity side fare quite well this week. Like you said investors looked past the risk of-- some investors looked past the risk of Covid in the world's second largest economy and towards China's much anticipated economic rebound. We did see China SRI/ESG Equity Funds account for over half of the headline number of all EM Equity Funds with socially responsible or environmental, social and governance mandates. Giving a bit of an overview of Sector Funds dedicated to China, seven of the eleven groups posted inflows with Technology, Real Estate and Consumer Goods sitting as the top 3 earners. Can you expand a bit more on the trends we're seeing here?

06:54
Cameron Brandt
I'll back off and say that you raised a good point which is though we've been focusing on China, Global Emerging Markets Funds, the big diversified vehicles, they pulled in over $4 billion last week. You know that I think is tied a little more to the assumption that we're much closer to peak US and possibly European interest rates than the sort of more conservative scenarios suggest. And while China certainly is sort of the star in the optimist's firmament at the moment, certainly in terms of raw inflows, other dedicated fund groups largely in Emerging Asia have been-- or largely dedicated to Emerging Asian markets have also been doing pretty well. India Equity funds had strong flows last week, Vietnam Equity Funds continued their streak of above average inflows. Korea-- Funds dedicated to Korea have been taking in solid sums more often than not. Getting back to your specific question, you know those various China sectors, I think people see some residual value there. And some of that certainly isn't new. China Technology Funds have been attracting fresh money and frequently more fresh money than their US counterparts now for, I think certainly, over three if not four months. People are hungry for alternative ways to access technology without getting too exposed to the FANG stocks which do seem to have reached their pivot point at least for the moment in terms of valuations.

08:50
Kirsten Longbottom
Interesting, well moving on to I guess Europe and some of the Developed Markets, you spoke about a warmer winter blunting the impact of Russia's energy squeeze, improving sentiment in Germany and moderating inflation while on the other side of the of the atlantic, you pointed to consumer and manufacturing data softening and layoffs mounting. Which caused investors to fear that the US federal reserve policy makers have already overshot the ideal pivot point for interest rates. Are outlooks shifting for both?

09:26
Cameron Brandt
I think they are. Perhaps the key thing in all of that was that collectively the Europe Equity Funds we track recorded their first weekly inflow since mid-February of last year. That was a record-breaking streak of redemptions week in, week out. And certainly you know I think there's a feeling that, though Christine Lagarde recently did her best to puncture this particular balloon, that monetary policy makers certainly in the eurozone, feel more constrained about being too aggressive. Whereas the Fed, I think certainly feels it has a bit of a credibility deficit based on its transitory narrative really letting this current bout of inflation gather more momentum than perhaps it should. I don't think the Fed is going to be too draconian if the trends we're seeing in the data gather much more steam. I think it's likely to back off but you know, certainly what markets are signal is a certain amount of damage has already been done and we could certainly dip into a shallow recession this year, just because of the effects of the interest rates hikes we've already had. 

11:00
Kirsten Longbottom
And then I guess we'll end off where we kind of started. So in the Bond Fund universe, you did give a little bit on the themes and kind of trends around that. But what was most noticeable in terms of fund flows or allocations data? Were there any styles of bonds prospering this week?

11:21
Cameron Brandt
Well, there were a number of things that stood out. Again, the flows into Emerging Markets and Global Bond Funds were the biggest in pretty lengthy periods, like well over a year. The one that particularly caught my attention was that US Bond Funds recorded their first retail inflows since the final week of 2021. So such a long gap that I certainly paid some attention to that. In terms of, especially in the US space, there was some appetite for All Durations and interest in certainly Investment-Grade, Corporate and Sovereign Bond Funds was you know I think slightly tilted towards Sovereign but not dramatically and so there was roughly equal interest. I mean what was noticeable was where the big outflows were and that was in Inflation Protected Bond Funds.

12:00
Kirsten Longbottom
Great. Well thank you Cam and look forward to chatting next week! 

12:35
Cameron Brandt
Good, thank you!

12:37
Kirsten Longbottom
Bye!

12:38
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