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Bearish investors resort to indiscriminate selling

In the month of May, all asset classes apart from investment-grade corporate bonds saw net outflows, according to Morningstar’s fund flows figures. Something similar happened in February this year, when government bonds were the only asset class to register net inflows.

All equity categories have seen outflows for most, if not all of 2016. And high-yield bond fund flows again saw a sharp reversal in May after two months of net inflows. The last time investors were so overwhelmingly negative versus risky assets was in the autumn of 2011, at the height of the eurozone sovereign debt crisis. In November that year, every single asset class saw net outflows, suggesting investors were increasing their cash holdings as political uncertainty was driving markets down.

 

This sounds remarkably similar to the situation investors find themselves in now. In the run-up to the Brexit referendum, investors had indeed been increasing their allocations to cash and absolute return funds. And there’s little to suggest that the UK’s vote for Brexit has changed this. Government bond funds and ETFs might have recorded positive inflows in June, as the asset class again showed it remains a safe haven in times of political and economic turbulence.

But risky assets are likely to remain in the red for some time to come. The eurozone’s sovereign debt crisis was eventually contained after Mario Draghi promised to save the euro, and member states scrambled up enough money to establish a rescue fund large enough to reassure investors. But there is no such an easy solution to the political vacuum created by the Brexit issue.

Brexit is not ‘a Lehman moment’ in the sense that it will trigger a financial meltdown. But the UK’s exit process will take years, and it will be shrouded in uncertainty. This will prevent investors to go convincingly go long any time soon. So with the ECB having run out of ammunition to revive markets, fund flows are likely to remain muted at best for some time to come.   

Part of the Bonhill Group.