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14 Feb 2013
Forex Flash: Thoughts on the great Rotation – BBH
Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman notes that reports indicating that Americans have invested more in equity funds here in 2013 than they did all last year have given rise to talk of the "Great Rotation". He feels that the idea is that Americans are selling fixed income investments bought during the financial crisis and are buying shares.
He however, is less sanguine and he notes that there is a third asset class that should be integrated into the analysis: cash. Having surveyed the data and various reports, he feels that it looks like the flows into equities is not coming out of fixed income but rather money market funds and deposits. He writes, “At the end of last year, perhaps spooked by the pending fiscal cliff and policy paralysis, many investors boosted cash (money market and deposits) holdings. One estimate had cash holdings rising by about $350 bln in the Nov-Dec period and about $165 bln has flowed since the start of the year.”
He notes that last week, equity finds, including ETF's, saw an inflow of around $70bln, in comparison to $23bln in the whole of 2012. He feels that the $30bln inflows being reported by bond funds is a major argument against the “Great Rotation”, though he feels that this is a bit off the pace seen last year $40bln inflows during the same period. Looking a bit deeper he sees more insight into what investors are doing. He writes, “Of the $70 bln that went into equity funds (and ETFs), about 40% went international/global funds, which is more than half they took in all last year. Among bonds, about 40% also went to emerging markets, which is roughly tracking last year's record pace.”
Continuing, Chandler comments that Lipper reported that in the week ending Feb 6, equity funds (mutual funds and ETFs) saw $6.1 bln in new inflows, which was the seventh consecutive week of inflows. Of this sum, he notes $2 bln as in ETFs. However, Lipper notes that the SPDR S&P 500 ETF fell from top position the previous week to last on the back of $3 bln of redemptions. The iShares Russell 2000 index was on top with $700 mln inflow, followed by ishares Dow Jones Real Estate ETF, which took in $600 mln. He sees that traditional open-ended equity mutual funds saw inflows of $4.1 bln.
He writes, “According to Lipper data, the 5-week inflow of almost $25 bln is the largest inflow for such a period since the beginning of Q2 2000. Domestic funds, led by large cap, drew $1.1 bln. Global and international funds reported inflows of $3.1 bln. Emerging market funds saw $1.8 bln inflows. Lipper notes this was the fifth consecutive week that emerging market funds drew more than $1 bln.”
In Asia, Chandler notes that many bourses have reported strong inflows so far this year, in excess of 2012. In terms of the biggest gain from the year ago period, investors have bought almost $1.1 bln of Indonesian shares. He notes that in dollar terms, Japan of course is the largest bourse and in play, given the yen's weakness. Foreigners have bought about $14.1 bln of Japanese shares this year, which is 135% above the year ago pace. India is also a large beneficiary of foreign purchases. The $7.6 bln that has flows in represents a 725 increase from a year ago.
Looking further afield, he notes that on the other side, South Korea is a significant exception. Foreign investors have sold about $1.5 bln of Korean equities. The appreciation of the won against the yen appears to have contributed to the profit-taking. Taiwan and Thailand have seen inflows ($1.6 bln and $22 mln respectively), but are well off last year's pace.
That said, he finishes by writing, “We note that the Korea's Kospi appears to have bottomed at the second half of last week. The 2.5% bounce has brought it to a trend line drawn off the Jan 3 and Jan 23 highs. The next target is near 1985 (closed near 1976 today). Longer-term, a recovery could see 2040-2050. The technical condition looks favorable as the RSI has turned higher and the MACDs are crossing.”
He however, is less sanguine and he notes that there is a third asset class that should be integrated into the analysis: cash. Having surveyed the data and various reports, he feels that it looks like the flows into equities is not coming out of fixed income but rather money market funds and deposits. He writes, “At the end of last year, perhaps spooked by the pending fiscal cliff and policy paralysis, many investors boosted cash (money market and deposits) holdings. One estimate had cash holdings rising by about $350 bln in the Nov-Dec period and about $165 bln has flowed since the start of the year.”
He notes that last week, equity finds, including ETF's, saw an inflow of around $70bln, in comparison to $23bln in the whole of 2012. He feels that the $30bln inflows being reported by bond funds is a major argument against the “Great Rotation”, though he feels that this is a bit off the pace seen last year $40bln inflows during the same period. Looking a bit deeper he sees more insight into what investors are doing. He writes, “Of the $70 bln that went into equity funds (and ETFs), about 40% went international/global funds, which is more than half they took in all last year. Among bonds, about 40% also went to emerging markets, which is roughly tracking last year's record pace.”
Continuing, Chandler comments that Lipper reported that in the week ending Feb 6, equity funds (mutual funds and ETFs) saw $6.1 bln in new inflows, which was the seventh consecutive week of inflows. Of this sum, he notes $2 bln as in ETFs. However, Lipper notes that the SPDR S&P 500 ETF fell from top position the previous week to last on the back of $3 bln of redemptions. The iShares Russell 2000 index was on top with $700 mln inflow, followed by ishares Dow Jones Real Estate ETF, which took in $600 mln. He sees that traditional open-ended equity mutual funds saw inflows of $4.1 bln.
He writes, “According to Lipper data, the 5-week inflow of almost $25 bln is the largest inflow for such a period since the beginning of Q2 2000. Domestic funds, led by large cap, drew $1.1 bln. Global and international funds reported inflows of $3.1 bln. Emerging market funds saw $1.8 bln inflows. Lipper notes this was the fifth consecutive week that emerging market funds drew more than $1 bln.”
In Asia, Chandler notes that many bourses have reported strong inflows so far this year, in excess of 2012. In terms of the biggest gain from the year ago period, investors have bought almost $1.1 bln of Indonesian shares. He notes that in dollar terms, Japan of course is the largest bourse and in play, given the yen's weakness. Foreigners have bought about $14.1 bln of Japanese shares this year, which is 135% above the year ago pace. India is also a large beneficiary of foreign purchases. The $7.6 bln that has flows in represents a 725 increase from a year ago.
Looking further afield, he notes that on the other side, South Korea is a significant exception. Foreign investors have sold about $1.5 bln of Korean equities. The appreciation of the won against the yen appears to have contributed to the profit-taking. Taiwan and Thailand have seen inflows ($1.6 bln and $22 mln respectively), but are well off last year's pace.
That said, he finishes by writing, “We note that the Korea's Kospi appears to have bottomed at the second half of last week. The 2.5% bounce has brought it to a trend line drawn off the Jan 3 and Jan 23 highs. The next target is near 1985 (closed near 1976 today). Longer-term, a recovery could see 2040-2050. The technical condition looks favorable as the RSI has turned higher and the MACDs are crossing.”