As investors ponder whether to “sell in May and go away,” strategists say we’ll either see a “summer of stocks,” or a “summer of shocks.”
That’s according to Bank of America Merrill Lynch’s weekly analysis of capital flows, which also looks at how investors have allocated their capital.
So far, the “summer of stocks” seems to be on the cards: 59% of their customers’ money is in equities, 24% in bonds, 12% in cash, and 5% in hard assets/others.
However, the strategists warn that a “summer of shocks” is in fact more plausible. Among the factors that could make it real are a Fed interest rate rise in June, a surge in the Japanese yen, bond vigilantes jumping on China, the ISM manufacturing PMI for the US coming below 50 and, of course, the risk of Brexit — UK voters choosing to leave the European Union in the June 23 referendum.
Looking at asset classes, investment grade bonds saw inflows again in the week that ended on April 27, worth $3.9 billion. It was the eighth straight week of inflows — remember these started when European Central Bank (ECB) President Mario Draghi announced that the central bank will extend its asset purchases to include corporate bonds.
Emerging markets debt, which has seen a strong rebound, had its 10th week in a row of inflows, getting another $300 million.
High-yield bonds have also seen a recovery, posting inflows in nine of the past 10 weeks. They took in another $500 million last week.
In the equities space, the strong dollar trade is unwinding. European equities saw their largest redemptions since October 2014: $4.8 billion. It was the 12th straight week of outflows from European equities, the longest streak since May 2010.
Japanese stocks also saw redemptions worth $2.5 billion. It was the longest streak of outflows since February 2012, seven weeks in a row.
By contrast, emerging market stocks saw some inflows, worth $100 million, and US equities saw their first inflows in three weeks, worth $1.6 billion.