‘Fund flows still indicate H2 caution’

(Partial Video Trancript)

Is this the year of the bonds?

Hello, I'm Angeline Ong and welcome to IG's Trading the Markets. Here to discuss the second half and what fund flows are telling us is Dewi John, Head of Research at UKI at LSEG Lipper.

AO: Dewi, thank you very much for joining us. Before we get to the second half, just tell us what the fund flows told us in the first half.

DJ: It's been an interesting first half. UK fund investors have pulled more than £8bn out of equity exchange-traded funds (ETFs) and mutual funds and put more than £10bn into bond funds. This is the year of the bond, we've been frequently told by asset managers.

Alongside of this, where the UK market has behaved very, very differently to, for instance, the US or European markets is what's happened with money market funds.

Euro investors target money market

For instance, European investors have been putting money into money market funds. Why? Because we've got an inverted yield curve, so you are making more money at the short end, you are making more money on cash than you are on bonds in general, certainly longer dated bonds.

UK investors in aggregate have been doing exactly the opposite. We've had more than £40bn pulled out of money market funds year to date and since November of last year, we've had £55bn worth of money market funds pulled out.

The reason for that has been the mini-budget and the way that pension funds threw more than £60bn into these funds as a reaction to the mini-budget in October and this has been gradually feeding back into the UK market from November onwards.

So, that's created a very, very different picture for the UK market than it has for markets globally.

AO: How about elsewhere? How about the US? Given we still have a war in play, given we have the uncertainty of China and the lack of the reopening rally there and also all this concern surrounding the fact that high inflation still looms large and it hasn't come down as fast as central banks had hoped, what are the fund flows telling us, for example, about the US and Europe?

US seen as a safe market

DJ: Well, I'm looking at flows for UK investors, so this isn't my area of the market. I think we're seeing a similar picture with broad asset classes in these markets.

For UK investors, we've seen flows into the US as a safe market, but what most importantly we've seen, and I think this is a fairly general picture for fund investors globally, we're seeing not sector-specific or geographically-specific impacts being made within equities.

Despite the fact we've had significant outflows from equity funds in general, we're seeing strong inflows into global equity funds. That shows that I think that investors are quite uncertain about the future, they're placing their bets quite broadly.

Likewise, within fund markets, even though returns have been quite poor on these, investors have either rebuilt their positions from the wipeout they experienced last year, or have bought the story that this is a good environment for bonds, and probably bought that story a little bit too late, considering the current trajectory of rates.

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AO: Finally, what are the key risk events you're watching out for in the second half? Is it China? Is it something that no one's expecting? Is it the US economy not achieving the soft landing? Is it a worsening of the war? If you had to pick one, what is the key risk event?

DJ: All of those and more. We're always looking out for something that nobody expects. But if you knew it was a black swan, it wouldn't be a black swan, would it? I think the main thing is the US going into recession, and that pulling in other economies behind it. And China will be a factor in that, but primarily the US issue.

AO: Right. We have to leave it there, but we'll be checking in with Dewey and Shaw in the next few weeks. Dewi John, Head of Research at UKI at LSEG Lipper.