Rudi's View | Mar 21 2019
In this week's Weekly Insights (published in two parts):
-Central Banks Keep The Worries Away
-BC *Extra* Puts Small Caps In Focus
-Changing Climate Has RBA's Attention
-February Reporting Season: Final Observations
-Rudi On TV
-Rudi On Tour
[Non-highlighted parts will appear in Part Two on Friday]
By Rudi Filapek-Vandyck, Editor FNArena
Central Banks Keep The Worries Away
One of the curious characteristics of the 2019 rally in global equities is that while most commentators have been zooming in on the AbFab V-shaped performance against all odds, in the background investors have been withdrawing their money, leading to quite large net outflows which tend to indicate widespread unease and discomfort rather than the bullish view and optimism one might infer from face value index performances.
This observation has led to at least one strategist (Citi's Robert Buckland) to conclude "Buybacks, not investor inflows, now drive the US market".
While part of the global money flows can be explained by investors preferencing passive ETFs over active fund managers (unsurprisingly given many of the latter's dismal performances in 2018), outside of the US money continues to flow out of markets in Japan, China and the rest of Asia, as well as away from equities in the UK and Europe.
Bonds are the biggest beneficiaries, believe it or not. So much for the Armageddon predictions by all too eager inflation hunters and otherwise end-of-bond-bull-market doomsayers. More stimulus from central bankers ("expectations of") means bond yields go down, thus bond prices move up.
Whereas 2018 proved a rather difficult year for global bonds, at least as far as money flows are concerned, net inflows for global bonds have been positive in each of the first three months thus far in 2019.
So where does this leave us regarding prospects for equity markets?
If we take a negative view, we could interpret the latest global industry data as a firm warning signal; investors, clearly, are sceptical about whether equity indices should be at current levels. Global economic growth is still decelerating, and Trump's USA is no longer the exception.
In Australia, it's easy to get excited by a recovery in banks share prices and ongoing strong gains by large mining stocks, but investors should not lose sight of the fact the February reporting season, underneath the apparent share price responses, wasn't good; it wasn't good at all. If anything, February exposed more headwinds and weaknesses than most of us were expecting.
However, there is also the opposite view, in that if investors now have a large chunk of their cash outside of equity markets, this can potentially provide a big boost to markets if some or most of that cash starts flowing back in.
I am rather sceptical whether a trade deal between the Trump administration and China will be the catalyst for such a move. But an unexpectedly stronger performance from major economies certainly can. To borrow from US Fed communiques since 2016: markets remain data dependent.