Views From the Floor

The signal emanating from around the world; and fund flows and their implications.

Why we remain positive on equity and credit risk, and negative on bond duration.

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What next after the yuan’s slide?; and the indicator saying buy the dip…unless we are heading for recession.

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When the US Sneezes…

In August, we noted that the US seemed poised for an equity uptick. According to our indicators, the combination of relatively compressed multiples equity valuations (largely valuation multiples), fundamentals (earnings revisions, margins and the cost of borrowing), and risk (investor sentiment and liquidity metrics) signalled the probability of an equity upswing.

Drilling into the Valuation component, our CVI models are now showing a ‘buy’ signal across all geographies (Figure 1). For clarification, a market is deemed ‘buy’ territory when the above factors combine to drive the indicator below a reading of -1.

In our view, this is a welcome support of what we have written about previously: we may have another mini-cycle within this long, long bull market.

Figure 1. Composite Value Indicator

Composite Value Indicator

Source: Man Solutions; as of 8 November 2019.

Going With the Flows

US equity funds have experienced USD100 billion of outflows during 2019 (Figure 2). Around USD217 billion has been withdrawn from active funds, with USD117 billion redirected into passives. This represents the second largest equity outflow in 15 years, and the largest spread between equity and bond inflows since 2008.

Despite the outflows, equity allocations remain high by historic standards (Figure 3), in the 81st percentile since 1990. Flows into bonds have reached the 50th percentile over the same period. Cash, despite increased allocations, remains very low by historic standards.

So, while investors may be de-risking, they are doing so from a very high starting point. In our view, we are a very long way from a headlong flight from equities.

Figure 2. US Fund Flows During Past 12-Months

US Fund Flows During Past 12-Months

Source: EPFR, Goldman Sachs; as of 24 October 2019.

Figure 3. The Recovery of the Eurozone Labour Market

  Equity Debt Cash
  Percent of total assets
Holder Current Percentile since 1990 Current Percentile since 1990 Current Percentile since 1990
Foreign investors 50% 80% 38% 32% 7% 3%
Households 38% 78% 21% 52% 15% 22%
Mutual funds 54% 63% 26% 67% 18% 14%
Pension funds 50% 45% 27% 39% 2% 1%
Total 44% 81% 26% 50% 12% 5%

Source: Federal Reserve, EPFR, Goldman Sachs; as of 24 October 2019

With contribution from: Ben Funnell (Man Solutions, Portfolio Manager), Teun Draaisma (Man Solutions, Portfolio Manager), Henry Neville (Man Solutions, Analyst) and Rob Furdak (Man Numeric, Co-CIO).