The European Central Bank (ECB) will find itself the only game in town soon. It is the only major central bank still buying bonds hand over first, and therefore it is dictating the pace for private investors.
Data about the flows of capital into and out of various asset classes seem to confirm this. Investment grade funds have seen strong inflows for a while. Last week was the 22nd consecutive week in which investment grade funds saw inflows, according to data by Bank of America Merrill Lynch. In the week that ended on May 24, investment grade bonds saw $6.7 billion worth of inflows.
The next category of assets that is doing well is that of emerging market debt, which saw $1.1 billion going in last week. Emerging market bond funds have seen money going in for 17 weeks in a row, with total inflows at more than $33 billion this year.
Draghi’s stance and the good news on earnings out of Europe have been supportive for European equities as well, with flows growing since Emmanuel Macron won the presidency of France. European stocks have seen $15 billion worth of inflows so far this year.
Interestingly, investors no longer consider government bonds to be the attractive investment they once were. So far this year, the asset class has seen outflows in 14 out of 21 weeks. This is perhaps a sign that investors believe central banks will increase interest rates soon, but it could also be an indicator of increased appetite for risk.
However, judging by high-yield debt funds, it doesn’t look like that appetite for risk is being satisfied. That market now offers the lowest yield on record — consequently, capital flows into high-yield debt are slowing significantly.
Looking at sectors, technology has seen inflows for 12 weeks in a row, getting another $200 million last week, when energy saw inflows of $300 million and financials saw $100 million going in.
However, there were strong outflows from materials, worth $1.3 billion. Other sectors that saw redemptions were healthcare, consumer utilities and real estate.
The capital flows seem to indicate that investors have become more prudent in allocating funds, even if they are far from pulling in their horns. The weak growth of high-yield bets indicates that a plateau has been reached.
Perceptions have changed dramatically as to what was deemed risky just a little while ago. European equities and emerging market debt, last year’s risky areas, seem to be this year’s favourites. How long that will last depends to a large extent on Mario Draghi.