The blog is back up and running after a week of enforced inactivity – blame a lack of access to the PC!

Anyway, kicking off this week with my normal Monday macro roundup. Today we have three really interesting snapshots from the front line of macro research. The message – be cautious about long-term returns!

First up, it’s always worth watching US ETF flows, looking for deeper changes in sentiment. Which is where Deutsche Banks ETF Monthly report comes in.

According to Deutsche, they saw a flight to safety switch with their ETF proxies showing

“global equities (-0.58%) and commodities (-1.94%) underperformed. While USD (0.73%) and fixed income (0.10%) outperformed relatively. Among regional exposures, emerging market-led underperformance, returning -4.5% in June. Rising risk catalyst including USD impact, diminishing growth signals and China’s acceleration into bear market territory plagued EM performances. EM Asia (-4.82%) and Latin America (-4.10%) were notable underperformers.”

Crucially in June “ US-Listed exchange-traded funds net flows in June totaled -$2.2bn ($28bn Q2, $122bn YTD). Asset class inflow was predominantly fixed income ($7.5bn) focused. Other major asset classes recorded net outflows in June, led by Equities (-$7.2bn) and Commodity (-$2.2bn). Investors favored US domestic exposure in June, with net inflow totaling $2.8bn. While remaining reluctant to increase international exposure, specifically to emerging markets. EM led regional outflows with net flows totaling -$7.5bn. While developed markets recorded net outflows of -$5bn. Flows to small-cap funds led size category exposures in June. Investors continue to favor US domestic exposure through small-cap positioning. Small-cap funds recorded $2bn in net inflows and have accounted for $10bn of ETF flows YTD”. This much enthusiasm for small caps usually signals a late segment rally.

On a related theme, I met up with small and micro cap investor Gervais Williams last week. As always, an hour or two with the Miton fund manager is a rollercoaster ride, full of ideas, but what was notable for me was that he’s renewed the put option on his Diverse Income Trust and managed to in effect hedge against 40% of the portfolio. Crucially it seems like he got even better terms for the options than last year!

Over at SocGen Andrew Lapthorne has been asking where stockpickers should be focusing – the US or European equities? Using past data to give him perfect foresight, the SocGen quant maestro observes that

“With the dominance of the FAANGS, we’d guess that most investors would choose the US. So we’ve run a simple exercise that assumes you always managed to pick the 10% best and worst performing stocks in each market. Below we show the best and worst performing stocks based on 3 year total returns. As these are based on MSCI indices, there is survivorship bias, but as we show when it comes to the ‘winner’ and ‘loser’ portfolios there is little difference across regions. Hence the opportunity set in both regions looks equivalent. The problem emerges for Europe when we look at market cap. Yes, European winners perform in-line with US winners, but they just aren’t very big. In fact, the US winner portfolio is four times bigger. The European loser portfolio is also bigger post crisis”.

Last but by no means least, one is forced to admire the sheer bravado of US fund management firm GMO. They run a fantastic forward model which forecasts asset returns over a grand total of seven years – and they even update it on a regular basis. I marvel at this sort of crystal ball gazing, although one has to caveat it by saying that it only looks at fundamentals and then projects forward likely returns. According to GMO likely returns from US equities are looking fragile (well below the long-term average) but EM equities are looking more compelling…chart that goes with the commentary as at the bottom

“ Returns in the U.S. equity markets will be far below the 6.5% long-term historical average, according to the latest GMO 7-year Asset Class Real Return Forecasts (attached). Investors seeking higher yields should look to emerging markets, as the only asset class expected to deliver any real value over the next 7 years. GMO has revised its forecast for emerging market equities from 1.0% annual real return over the next 7 years in January 2018 to 2.7% in June 2018. It has also increased its forecast for returns on emerging debt, from 0.6% annual real return in January 2018 to 2.3% in June 2018. “