MARKETS SPECTATOR: Safety exit
The latest data from Bank of America / Merrill Lynch suggests money is beginning to rotate out of bonds towards equities. Since November 2012, equity funds have now seen $40 billion of inflows versus only $15 billion into bond funds, as can be seen in the chart below.
This confirms what I wrote about yesterday in that at this stage of the cycle, and with so much money tied up in safe haven assets (cash, bonds, precious metals) there's going to be a rotation towards equities as risk appetite improves and investors begin to realise that safe haven assets may not be so safe, especially when money is flowing out of them (Markets Spectator: The quiet bull, January 7).
Interestingly from a regional perspective, emerging market equities have seen 17 straight weeks of inflows, which is the longest streak since the fourth quarter of 2010. Of this, global emerging markets products and Asian funds have been the main beneficiaries, especially China facing funds.
This also confirms our view, which we discussed at length in the last three months of 2012, that there is going to be a large reallocation trade towards China as a large proportion of the investing community was caught underweight or short Chinese equities just as economic momentum bottomed.
Elsewhere, Japanese and US equities saw modest inflows while European equities were the only region to record outflows.
Looking at the different sectors, it's not surprising to see money flowing towards financial and material sectors, especially the latter given many of them are China facing.