The latest batch of US mutual funds inflow/outflow data has been released by the Investment Company Institute in the US today and guess what ? It is business as usual for US investors….Buy international equities and sell bonds…guess no one has been paying scant attention to the equity market wobbles we have seen aside the wannabe Roubini and other scaremongers of this world. anyhow the usual charts are below….
No doubt the international equities buying trend remain strong and this despite the recent comments by Yellen and weaker than expected ( but not weak) US economic data as well as the recent jitters in the equity and emerging markets. Clearly this may have provided a short term respite for bond holders but my thoughts are that all this will be short lived and that we will soon see the 10-year US trading above 3%. Also the continual purchase of international securities by US investor is likely to bring headwind for the US$. This is possibly highlighted by the high resilience of the EUR-USD bearing in mind the differences in yield and economic growth of both the US and Europe…..Bearing in mind the rumoured long US$ position of the market it may be tempting to become contrarian. Even at 1.3600 the Euro could still provide some good profit opportunities…..
Ok it has been a couple of eventful weeks if you were invested in equities be them from developed markets or emerging markets. Clearly the scaremongering of analysts and journalists paid by the line rather than the true profit they generate has somehow fed into the volatility and sudden lack of rationale of markets. We have seen a spike in the VIX and as indicated by a 2-state Markov regime switching model a risk off scenario. As mentioned in my previous post, it is worth bearing in mind that those periods of risk aversion tend to be short and somehow provide good ground for opportunities.
True the sell off somehow pushed most equity markets in the red. But if one take time to look at the moves that unfolded they have not been really out of tune from what could be expected from the median risk of equity markets. By that I mean that if you assume that equity markets have typically an annualised volatility of 20% this means that the monthly move expected under a normal distribution assumption should be tantamount to 20% * 1.6450 /sqrt(12) = +/- 9% . So true enough some of the markets such as Japan and Chile have gone somehow out of this range as shown in the below chart. But I would argue that we are not miles away and that there is no reason to panic because a herd of unknown analysts have come out from the woodworks forecasting the end of the world as we know it…..a loss of nerves is is to be expected every time we have a down move of more than 5%.
In respect of the S&P500 the move we have seen over the last 21 days is indeed pretty much middle of the road as a close neighbour analysis using daily data back to 1980 demonstrates. From there the scenarios are quite varied…
So let’s go back to the catalyst of those financial ripples, the Fed policy an its impact on global liquidity. Well , there is nothing new about the Fed reducing its liquidity supply. We have been told last year what was the plan and you are better getting use to it ! Bottom line is that things are going very well in the US, the data is clearly indicating a strong recovery which is logically feeding into both the housing markets and the equity markets. So it may well be that the liquidity which is smoothly withdrawn by the fed will in fact be replaced by investment flows and a growing trading activity between the developed world and emerging market countries as those economies recover and re-leverage. Perversely this could have a negative effect on the dollar as it will mean more cross border flow toward new international opportunities by US investors and corporates. Also as growth come back and US withdraw some of its liquidity it is likely that some of the EM countries will draw on there reserves which is predominantly made of US$ to stimulate their own economies. Anyhow it is worth looking at the latest batch of data on inflow in US Mutual funds as it now cover the recent period of volatility.
And guess what…. investors are still buying international and domestic equities significantly. Bonds flows have somehow recovered ever so slightly….though my view is that they will probably shift back to negative for the reasons presented in my previous posts…..So I think I ll keep re-investing those dividends in financial equities for a while..