Investor Flows: Placing the Chips on ‘Global Synchronized Growth’

Summary

Over 50% of flows into ETFs over the final three months of 2020 were directed into global and inflation-friendly assets. Global synchronized growth better show up in 2021!

Investors enter 2021 very similarly to 2020 with heavy flows into risk assets and out of U.S. Treasuries. Is this a ‘do over’ after COVID-19 wreaked havoc on economies and dashed hopes for global synchronized growth in March?

Investors’ dive into global equities and fixed-income assets is even more emphatic than to begin 2020. Equity ETFs focused on global or country-specific exposure outside of the U.S. accumulated $52.9 billion over the final three months of 2020. More notably, fixed-income ETFs have seen the strongest surge on record exceeding $10.9 billion.

Over 75% of economies across the globe are producing economic data above one-year average growth rates. Needless to say, global synchronized growth must endure to satiate investor expectations. 

Improving global growth coupled with stimulus have driven the heaviest flows on record into inflation-friendly ETFs. Inflation protection (i.e. TIPS) maintain very healthy in-flows over the past three months nearing $4.9 billion. Inflation swap caps and floors reflect similar optimism by pricing in 50+% probabilities headline CPI can average above 2.0% year-over-year for the next five-plus years.

On the equity front, investors are opting for lower-beta risk-on opportunities to capitalize on rising prices via industrials and materials. We have preferred these sectors since summer thanks to China’s speedier rebound and favorable search activity world-wide. 

Investors’ flows into the global assets shown above and inflation-friendly assets shown below comprise just over 50% of all in-flows. In other words, just over half of all new investments are betting global growth quickly improves with inflation as the likely kicker.

Along these lines, government ETFs away from the long-end have suffered steady out-flows on a rolling three-month basis since July.

We keep coming back to the average path of financial markets following recoveries from global slowdowns. Investors are seemingly doing the same. We have identified nine past global recoveries since 1965. We rely on OECD composite leading indicators (CLIs) for 35 economies. The percentage of CLIs above trend (i.e. 100) rebounding back above 20% provides this signal.

Recoveries from global slowdowns have consistently seen U.S. 10-year note yields rise on median 50 basis points over the ensuing three-months. Investors’ bearish flows over the tail-end of 2020 seems warranted.

Additionally, U.S. 10-year TIPS breakevens widen on median nearly 45 basis over the three months following the onset of a global recovery. 

The S&P 500 tends to produce very tepid gains over the first three months. Typically, equities rally ahead of the inflection point in economic growth, meaning the easy money has very likely already been made.

The lukewarm outlook for equities again makes the lower-beta options in industrials and materials appetizing. 

The end to 13(3) facilities along with potential for rising Treasury yields has dampened investors’ thirst for both high yield and investment grade corporates. Aggregate bond funds continue to scoop up the majority of in-flows.

The tables below show rolling flows into commodity and equity ETFs as z-scores for easier comparison. Environmentally-friendly and other thematic categories (e.g. A.I.) have relatively been the biggest gainer as consumers saw the transition to a more digital economy hasten. 

Ultimately, 2020 will be the year of fixed-income even though the heaviest of in-flows occurred from late spring through early summer.

However governments saw little to no fanfare in 2020, while remaining fixed-income categories accumulated sizable flows.

The final table shows rolling flows into fixed-income ETFs by maturity band as z-scores.

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