Equity fund flows are very very pessimistic at the current time. Globally, investors have been exiting the equity market and chasing defensive assets with yield, like government or corporate bonds. It seems that everyones favourite group of "experts", financial advisors, are now running around circles recommending mums and dads to take money out of the stock market and place it into a more "safe" bond investment.
According to Nomura's recent research (chart below), cross board equity fund flows for the US, Europe and Japan are now at the second lowest level in over two and half decades. The only time investors were more negative was during the once in a generation 2008 crash - and we haven't seen one of those since 1974 or 1932 prior to that. I actually found the whole thing so astounding after I noticed that outflows today are relatively worse than back in 1987, when the stock market globally crashed between 40% to 60%. Boy, are people scared to death of losing money in stocks!
On top of that, contrarian investors should note that every crisis brings about a buying opportunity, which is shown very well in the chart above. This is something mums and dads, and their financial advisors are yet to figure out. Be it the Gulf War in 91, Mexican currency devaluation of 95, Asian financial crisis of 97, Russian bankruptcy of 98, 9/11 terrorist attacks or the Enron & World.com scandals of early 2000s - all of these events create buying opportunities for strong returns going forward next 6 to 12 month. In other words, being a contrarian against the flow of funds and the flow of bad news usually pays returns. I guess I can say that is quite a smarter thing to do than herd into bonds and any other safe haven assets - which seems to be the most popular investment right now.
Fund flows to the ever popular Global Emerging Markets (GEM) have slowed down remarkably over the last 12 months as well. The BRIC fairy tale stories of strong economic growth are not working on investors right now as they are replaced by fear stories of high inflation rates and Chinese property crash. The chart above, once again thanks to Nomura research, shows relative equity returns vs Developed Markets and overlapped by mutual fund flows, which are than forwarded by 12 months to predicted future returns. The correlation between fund flows and forward returns stands at negative 71% since 1995.
In plain English these two indicators move in opposite directions, so the higher the inflows and optimism, the worse the performance and visa versa. The chart above shows that we are approaching an inflection point at which point GEMs should start outperforming the rest of the world. Funnily enough, just as we arrive at the point where investors should look for potential opportunities in this area, majority of global investors have been withdrawing money in an almost panic like fashion. While we are not yet at 12 month rolling average of outflows, we are definitely close to it. Keep an eye out on GEMs, because if they do fall hard one more time, do not hesitate to jump in with both feet. You will be a lot richer 12 months after!
Finally, lets look at the short to medium term picture in chart above. We are looking at domestic mutual fund flows. It is safe to conclude that mums and dads have been exiting the equity market in a hurry in the US, especially since the peak in early May 2011. As a matter of fact, we have seen 8 monthly outflows from the equity market this year, out of the possible 11 months. Even more importantly we have had some serious money leaving including a $30 billion outflow in August during the market crash.
I think it is safe to say that retail investors are completely scared the hell out of the equity market, mainly due to the insane volatility and also due to the consistently negative and fearful news flow that seems to bombard them on daily basis. I can now assume that it will be a long while until we actually see a proper monthly inflow, let alone two in the row - sounds like a wall of worry to me...
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ReplyDeletePlease don't advertise the same thing over and over.
ReplyDeleteHi Tiho
ReplyDeleteMany congratulations on your excellent blogging over the year.
Question: what reliable indicators are there that gold remains in a bull market, despite its current correction. I've read a couple of articles suggesting the secular gold bull is at an end; a couple of others arguing the bull is still intact. Twelve years is a long time; how can we know it will continue for longer?
Cheers
Martyn
Martyn, thank you so much for the kind words.
ReplyDeleteGold is definitely still in a secular bull market. But you see, secular trends also have cyclical counter trends. That is what is happening right now, Gold is correcting and it will correct more. Maybe it will even fall all the way to $1,300, who knows... we will see soon enough.
But to answer your question, Gold's bull market is going to end in a bubble phase and we do not have anything even remotely close to bubble phase yet. Bubble phase usually ends when the whole world is invested in an asset class and trading it regularly like Nasdaq in 1999. On top of that previous secular blow off tops in Gold ended with valuations of 1:1 or 1:2 with Dow Jones and 4 to 5 times the value of S&P 500. On top of that Gold tends to back the Monetary Base by 100% like in 1980 and also 1930s. Currently that would mean Gold at $9,500.
I will eventually do a post on this topic when the time is right, but for now Gold is in a short term downtrend. Lets just focus on that for the time being...
Tiho:
ReplyDeleteAnd all of this with interest rates at zero in the US-just amazing behavior.
Fed said yesterday they will keep rates down another 18 months-20,000 on the Dow in sight?
Higher prices will bring them back to stocks down the road.
Yeah I understand, but you have to understand that negative interest rates work to help the Gold bull market, but once everyone piles in, we get a downdraft for awhile.
ReplyDeleteRemember, nothing goes up forever without a correction or a bear market - no matter how good fundamentals are. First and foremost, always follow the price!
Gold is overdue for a 20%, 30% or even 40% fall after a 3 year power run up and an 11 year annual gain in the row. So in other words, we are overdue for a cyclical bear market, within a context of a secular bull market.
Afterwards, we can continue higher.
Would you say the same for silver - where gold goes silver follows? A big correction coming for silver before another bull run taking us over the 50 buck mark?
ReplyDelete