Flows to funds offering exposure to US assets may pick up: Cameron Brandt

I do not see yields climbing as much as some predict, says Brandt

The recent geopolitical developments around the war between Russia and Ukraine have put investors in risk-off mode as global equity markets have turned volatile. CAMERON BRANDT, director of research, EPFR Global, tells Puneet Wadhwa in an interview that funds dedicated to Canada, Greater China, and Saudi Arabia are the ones that have seen a marked pick-up in flows since markets began to focus on the prospects of military action by Russia. Edited excerpts:

How do you see investor flows play out in 2022 as the US Fed and the other central banks look to hike rates? Which equity markets are they likely to chase over the remaining part of the year?

Until the recent Russian attack on Ukraine, markets were much more concerned about the US Fed’s “soft power”. That attack, and the knock-on effects, is being interpreted as a check on the ambitions the Fed might have to front-load any tightening. So, I think flows to funds offering exposure to US assets are likely to pick up.

Will the current geopolitical concerns be a significant factor in how flows get allocated across regions in the short to medium term?

Yes, the current geopolitical concerns will be a significant factor. Funds dedicated to Canada, Greater China, and Saudi Arabia are the ones that have seen a marked pick-up in flows since markets began to focus on the prospects of military action by Russia. Canada and Saudi Arabia stand to gain if sanctions hit Russian commodity and energy exports; China is seen as a “safe haven” play if monetary policy in the US and Europe starts to tighten.

Can the year 2022 see outperformance from developed markets? What factors can bring back focus to emerging markets?

With the fiscal stimulus fading in the US, inflationary pressures in many developed markets, and the geopolitical challenges facing Europe, it is hard to see developed markets outperforming in 2022. However, it is equally hard to make the case for any emerging markets. But emerging markets do offer better valuations and, in some cases, are ahead of developed markets when it comes to taking necessary policy measures to contain inflation.

What’s driving investors to Chinese equities? How much inflow have they seen in the past six months as compared to their other Asian and global peers? Do you see this trend continuing?

Institutional investors steered over $37 billion into China equity funds during the second half of 2021 (H2-2021). While regulatory crackdowns on key sectors chased retail investors to the sidelines, their institutional counterparts believe fiscal and monetary policy will be highly supportive during a year that concludes with the ruling Communist Party’s 20th Congress.

How big a threat will bond markets/yields pose to stability in equity markets across the globe amid rate hikes over the next few months? Do you see central banks coming to the rescue? What measures can be adopted?

I do not see yields climbing as much as some predict. With the “Baby boom” generations retiring in the US and Europe, you have a large cohort of investors whose desire for relative safety is reflected in the fact they’ve been willing to accept the minimal or negative yields offered by AA- or AAA-rated sovereign bonds. Central banks are not the only price-insensitive buyers in the market.

What is your view on debt funds now? Is the risk-reward unfavourable from a one-year perspective?

It is arguably better than those for alternative asset classes such as cryptocurrencies, and fund groups dedicated to those assets are seeing strong inflows. The path inflation takes will have a lot to say in making a judgement on the risk-reward trade off this year.

Foreign institutional investors have been on a selling spree in India since October 2021 and have withdrawn nearly $11 billion from the Indian equity markets. Do you see the trend reversing anytime soon? In which regions has this incremental money in the hands of foreign investors got deployed?

With volatility on the rise globally, they want their money in markets and asset classes closer home. Energy price trends, given India’s need to import oil, are also a concern.

Twitter : @Pun_ditry