This week, Cam and Kirsten talk about...
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Hello everyone and welcome to the EPFR Exchange Podcast. My name is Kirsten Longbotham and we are joined by EPFR's resident economist Cameron Brandt. Each week, we like to share with you a little bit about EPFR's data, what we're looking at in the Funds Flows and Allocations data that we track and how world news plays a role into that all. Cam, how is your week this week?
It's been busy getting ready for the SKO. And we continue to do a fair amount of transitional work to get EPFR up on its own feet as a standalone company. So you know plenty of things to do on different fronts. But the world outside our immediate concerns continues to be interesting in the Chinese sense of the word. So no shortage of stuff to chew over.
No, definitely not. So we've seen three groups show up in the headline of the latest global navigators: bond funds were buoyed by lower inflation in mid -january, emerging markets caught a wave too and now Europe Equity funds were the latest to catch a lift. Sentiment towards europe assets has thawed rapidly, what are the major influencers here?
So I think there's a variety. I think the biggest influence continues to be optimism that the data is increasingly adding up to an answer that will allow the US Federal Reserve to stop hiking rates and start signaling to markets when those rates might actually start to go down. But there's a number of other causes for up optimism. China's rebounding economy, though it's yet to happen, everyone expects it will, you know is seen as good news for global growth and more particularly for the European economy. Exporting to China has been a big part of their growth model in recent years. And hopes that Europe will also have some internal drivers of growth have certainly gathered steam in recent weeks as the supply levels in the natural gas storage tank farms around Europe remain at much higher levels than people were anticipating.
So is our data aligning with the overall consensus that inflation fighting is close to over?
Yes and you know, our Bond Fund Flow data has basically shown a fairly high level of both skepticism and front running of the Fed really since about the second quarter of 2020. Inflation Protected Bond Funds took in above average inflows from that period all the way up to the moment the Fed said that maybe inflation wasn't as transitory after all. And since then it's headed briskly in the other direction. And certainly the feeling seems to be that what the Fed has done is enough to do what it hoped to and that loading up on inflation protection at the moment is not the best use of disposable investment capital.
Money market funds haven't been a topic on here for quite some time. They did post a modest outflow after four weeks where $135 billion flowed in. $105 billion of that was institutional investor directed. Was this a US or China Money Market guided stretch or what are investors thinking about in the space right now?
Well I think that the US flows were the main driver. You know certainly I think investors have been parking cash while they sort of look to see where they're going next. US money markets are short-term vehicles. They often hold cash for things that like corporate buybacks, which as our colleague Winston Chua keeps illustrating are still running at exceptionally high levels. But then cash is also at the moment being viewed as a somewhat better asset class than it has been. You stick it in the right- near cash vehicles such as a Money Market Fund or an IRA and you'll actually get a return now. It may be well below inflation but it is a return. So you know I think it's a combination of factors. Perhaps the more important aspect there is that what we do see in the Money Market Funds we track is that a fair amount of the cash that flowed in during the immediate aftermath of the pandemic shock back in 2020 has stayed. And what that means is that there are still excess savings available to sort of either fuel the first leg of recovery or to resist the pressures from higher interest rates. The estimates vary widely, but a fairly common number for the US, well down from its peak but still around $1.2 trillion in excess savings, a number that crops up frequently in relation to China is $2 trillion, these are dollar figures and somewhere around a trillion in Europe. So you know one worthwhile signal to stay on top of, that it does emerge from our Money Market Fund data is that there's still spending power out there. And when and how people choose to deploy it will obviously have implications for fighting inflation, which sectors to back, what kind of growth models to buy into.
So we usually give China a lot of airtime on this podcast aa it's especially a big player in the emerging market space. But what about India Equity Funds? The latest week saw their ninth consecutive inflow and largest since the first quarter of 2018.
Yeah, India certainly has got some wind in it sails at the moment. Last year, it overtook the UK in terms of the size of its gross domestic product. This year, it looks set to overtake China as the most populous nation in the world, growth has been running around 6%. India is one of those markets that does tend to flatter to deceive frequently once it gets going, some kind of policy misstep under cuts the full potential of where it might have got in that sort of upward swing. But it is certainly a market that investment banks and fund managers are talking about. It is somewhat more transparent than China's markets and somewhat easier to get your money into and out of which is an appealing feature. And it's obviously getting a lift at the moment, in that the worst case scenario for global energy prices hasn't materialized. Which is a big issue for India given it imports something like 80 to 85% of the oil that it uses.
Interesting, well I guess we can move on to Sector Funds. So you isolated two groups this week, cybersecurity and also defense and aerospace as these topics have dominated headlines recently. Are investors particularly interested in these funds or are they moving away from them?
Well, we've seen sort of a changeover. In 2020 when the rising US-Chinese tensions were sort of dominating the headlines and people's thinkings how to stop the alleged theft of intellectual capital and data by chinese actors figured prominently in people's thinkings and there was a surge in demand for cybersecurity solutions and investors focused on funds that invested in that. We saw a marked shift in the aftermath of Russia's attack on the Ukraine and the more conventional Defense and Aerospace Funds started to see more money. I was a little surprised that Cybersecurity-firm Funds were not seeing continued inflows because it was certainly expected that cyber warfare would be an important part of Russia's strategy, both for putting pressure on Ukraine and on the nations that are backing it. So the shift in interest while not unexpected, has been sort of surprising in the degree. And speaking of degrees, I noticed that you started to mine our Commodity Sector Fund data to a greater degree than I think we've done recently. What did you unearth in this exploratory expedition?
Good question. Well you know as EPFR coverage has expanded, there's been a lot of credible subgroups in many of the different areas that we track. We've talked about energy and technology subgroups here on that podcast before, but for commodities we did identify 11 major groups. Some of them included Steel, Rare Earth & Metals and Chemicals. Those three groups took in fresh money this week but other groups like Lithium & Battery and Timber & Forestry saw outflows. Gold and Silver funds are also included in commodities. Some funds are included in that and and those did see inflows this week.
Well it'll be interesting to see what sort of stories these more granular corners of some of our Sector Fund groups start to tell us.
Definitely. I guess we can leave it off with one question. So not only does EPFR track Fund Flows, an indication of investor sentiment. But we also track allocation data, so how much fund managers are allocating to a specific group. What is the latest data show for GEM fund managers?
So GEM fund managers are, certainly on the GEM Equity side, buying into the idea that there will be a serious rebound in China's economy and it'd be a good idea to position themselves for that. So that was probably the biggest takeaway from the sort of latest update on certainly our country allocations data.
Great. Well thank you Cam and look forward to speaking next week.
Likewise, enjoy the weekend.
Great, you too, bye!
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