This week we kick off with a trifecta of big picture numbers.
First off, away from the madness of Gamestop, what have mainstream investors been putting their into over the last few weeks?
One of the best ways of understanding momentum flows is to look at data on exchange-traded fund (ETF) creations and redemptions.
Last week the SocGen ETF analysts team published their latest report, which suggests that in January their universe recorded $75bn net new money. The winners?
International stocks, cyclicals, value and….bonds ?!?
Here’s the SG summary!
“While $50bn was invested in equity ETFs, Fixed Income ETFs posted the largest creations relative to total assets (1.5%). ETF investors were moderately bullish, showing preferences for International over US Equities, Cyclicals over Defensives, Value over Growth, USD Inflation-Protected bonds over US Treasuries and Investment Grade Credit over High Yield Corporates. Silver was in demand while ESG-screened strategies accelerated further at the expense of traditional exposures….
“ The most traded strategies included US Financials (Financial Select Sector), Value (MSCI EAFE Value), the Innovation themes (ARK Innovation, ARK Genomic Revolution), Renewable Energy (S&P Global Clean Energy) and USD Bond Allocation (Bloomberg Barclays US Universal). The Hang Seng, Dow Jones US Real Estate and USD High Yield Corporates (Markit iBoxx USD Liquid HY Bond and Bloomberg Barclays Very Liquid HY Bond) reported the largest divestments.”
The chart above reminds us that the one stand out star of 202 was ESG funds.
This growing army of funds was the subject of another report by analysts at SocGen.
The headline figures from this analysis are worth pondering for their sheer scale.
According to SG at the end-2020 EPFR ESG funds’ assets under management (AuM) “reached $1.6tn, having increased tenfold since 2017 and doubled in size almost every year. …So far, Europe is firmly in the lead as 8.2% of European funds are labelled ESG, well ahead of US or Asia with 1.4% and 0.9% respectively.”
In 2020, ESG funds had $237bn of net inflows (+172% yoy; +34% of ESG funds’ AuM) and represented a disproportionately high 15.5% share of inflows into the all EPFR fund universe (ESG and other). These trends continued in January.
And crucially, it looks like outperformance has been driving these flows – In 2020, ESG funds outperformed the overall EPFR fund universe (+10.4% and +7.0%, respectively), continuing the trend seen since 2013”.
Regular readers will know that I keep a beady eye on data suggesting that inflation rates might start picking up aggressively. For the avoidance of doubt, I think the chance of hyper inflation is very low, while the chances of inflation in the UK picking up consistently above 5% are not much higher.
But I do worry that if inflation rates start rising above 3% and then stay there for a prolonged period of time, central banks might be tempted to tighten policy, and increase rates.
That could cause a strong allergic reaction from investors – Taper Tantrum Redux.
Analysts on Morgan Stanley European equity team keep an eye on this kind of data and its worth reporting back on their latest estimates. First off their US colleagues recently increased their 2021 GDP growth forecast up from 5.9% to 6.5%. And of course stronger growth might also result in higher inflation – the US Morgan Stanley analysts now reckon that core PCE inflation will hit 2.2% in December 2021. Nothing so far to worry about!
Other measures though suggest that there is growing evidence of inflationary trends starting to emerge.
“US Composite PMI Input Prices already at record high. Even before this stimulus is enacted there are strong signs of a rising inflation environment. This week’s release of the US Composite PMI showed the input prices component at a record high on data back to 2009, while output prices were within a whisker of an all-time high (Exhibit 1). Similarly the ISM Manufacturing PMI survey showed prices paid at the highest level in ten years, with 100% of industries surveyed facing higher prices. Another potential source of inflation pressures is the low level of inventories. Exhibit 2 shows that the customer inventories component of the ISM survey is very close to an all time low, and historically as that series has bounced, so too has inflation”.
Last but by no means least increased inflation might be either good or bad news for the growing legion of undead corporates. Zombie loans are huge and growing by the day, artificially supported by mammoth central bank lending programs.
I suppose increased inflation might help boost profitability but on balance, my hunch would be that higher inflation equates to higher lending rates and thus MORE defaults.
A note out last week from the alternatives specialists at Ocean Wall highlights the sheer scale of the legion of undead. Is this a colossal market risk – or a huge opportunity?
“More than 200 companies have become so-called “zombie companies”, categorised as a business limping through the economy burdened by their debts and unable to earn enough to pay off their interest. The “Corporate undead” are populated with titans of industry, Boeing, Carnival, Delta Air and Rolls Royce and what is more staggering than the calibre of companies with such status, is the below graph that shows the added $1trn of debt that they added over the pandemic. The question is what is the fate of these companies? When the debt holders want their money back, and the corporate relief programs end, which companies will manage to grow out of their debt and restructure to stronger more resilient businesses, and which companies will downgrade further and become fallen angels?”
Source: Bloomberg Dec 2020