Despite warnings in some quarters about an imminent stock market crash, equities and other risky assets still have plenty of room to run, according to a recent analysis of movements of capital.
Capital flows indicate that sentiment is improving but is still bearish, the latest reading of a bull/bear index developed by Bank of America Merrill Lynch shows.
The index tracks sentiment on the basis of indicators like market exposure by hedge funds, fund flows or long-only investor positioning.
The latest reading is 3.0, up from the contrarian “buy” signal of 1.7 triggered on January 7, but a long way away from “extreme bullish” territory.
Central bank benevolence – with the European Central Bank starting quantitative easing next month and the Federal Reserve hinting at more patience than expected on interest rates – has sparked a rally in risky assets in February.
Data on capital flows for the week that ended on February 18 shows that risk appetite is recovering, with $11 billion exiting money market funds and $13 billion going into equity and bond funds.
In equities, total inflows were $6.4 billion, with $5.8 billion in Europe, which saw the sixth straight week of inflows. The analysts at Bank of America Merrill Lynch dubbed European equities “the crowded trade.”
An earlier survey had shown that investors’ favourite European country was Germany, while their least favourite were the UK and Switzerland.
Emerging market equities also saw modest inflows of $800 million in the week that ended on February 18, the second straight week of inflows in the asset class.
By contrast, US stocks saw $1.2 billion leaving, while Japanese stocks lost $400 million to other assets.
Year to date, equities saw inflows totalling $21 billion – they had lost $32 billion in the second half of last year, so much of 2015’s inflows could be money going back into the asset class as the market is in “risk on” mood again.
This does not mean that people have forgotten about fixed income.
The lion’s share in terms of inflows into bond funds again went to investment grade bonds, which saw their 61th week of inflows in a row after receiving $5 billion last week.
However, there were some negative developments in government debt in Europe, and not necessarily because of the spat regarding Greece.
Last week, government bond funds domiciled in Europe saw outflows of $136 million, the first outflows of this year.
Yields of more and more government bonds sliding into negative territory were the main reason behind it, as investors’ fears of more volatility in the markets receded for now.
High-yield debt funds, which in the previous week saw their biggest inflows since July 2013, had their fourth straight week of inflows, with $2.1 billion going in.
Emerging market debt funds also saw their third week in a row of inflows – quite small, however, with just $99 million in capital.