Investors’ risk-on bias continues to evolve with flows intensifying into global equities and inflation protection. Sector-based flows have improved, but have been heavily focused on energy, financials, and materials. Consumer discretionary, technology, and thematic (e.g. ARK) remain out of favor. Fear of inflation runs high with inflation protection taking in $4.5+ billion over the past month.
Bigger picture, the spread between flows (z-scores) into equities versus high-quality fixed-income has receded as expected from extremes. Demand remains lukewarm for fixed-income, but the hefty enthusiasm for all things equity is fading.
Under the surface, going-out industries have stalled since mid-March, just like Fed funds futures and long-term Treasury yields. Staying-in industries have entered a trading range of their own. Industrials, which we have preferred on a risk-adjusted basis since last summer, best maintain the re-opening rally.
Investors have diverted a increasing portion of equity flows overseas, predominately to European destinations. Asia Pacific has joined the party led by China.
The most impressive flows have occurred across inflation-friendly assets from commodities to TIPS. Over $7.8 billion has flowed this past month into commodities (ex-precious metals) and TIPS, the most on record. The complete group of inflation-friendly assets shown below have seen a whopping $14.3 billion of in-flows, exceeding the strongest flows seen since the pandemic got underway.
Broad-based commodity funds continue to see record demand despite many industrial metals moving sideways. Fears commodities would see a redo of the March 2011 experience have been tempered.
Governments continue to see little long or short bias with yields grinding higher from the smallest of emerging markets to the largest of the developed world.
Lastly, investors’ thirst for corporate bonds continues to run dry. Instead, flows have been sent into the more diversified aggregate bond funds. The Federal Reserve selling its holdings of corporate bond ETFs has produced little to no reaction.