(March 16, 2012) — Rumours of a ‘great rotation’ abounded in global markets this week as investors put the largest amounts of capital to work in equity funds in almost a year.
Some $9.6 billion flooded into equity funds, according to Bank of America Merrill Lynch, the highest amount since April 2011, and signalled a renewed risk appetite among investors.
Improvements in equity markets, spurred by renewed confidence in economic solutions in the Eurozone, have eased investors back into risk-taking. The inflows this week make up more than a third of all inflows this year – some $24.2 billion in total.
The bank said in its weekly report: “[The] potential for a ‘Great Rotation’ from bonds to equities is huge (since 2008 bonds inflows = $480 billion versus equity outflows of $48 billion).”
The largest beneficiaries of these inflows were exchange-traded funds, the most liquid and easily tradable tools – which also cost relatively little to hold – and long-only funds actually saw small outflows.
Japanese equities saw the biggest inflows since August last year, albeit with a modest $600 million, while the United States also saw record inflows this year, and the largest since September, with $9.1 billion entering its funds.
Robert Farago, Head of Asset Allocation at Schroders Private Banking, said investors needed courage to allocate to Japan, but there were a number of factors that pointed to the current stock market rally would continue.
He said: “The Bank of Japan is under increasing political pressure to become part of the solution to the country’s economic woes and a change in central bank governor next year increases the odds on a further shift to easy money.
“We see profits rising rapidly over the next twelve months as the economy rebounds from the devastation of tsunami. An easing of monetary policy that brings a weakening currency will provide an additional boost to a corporate sector that has proved adept at cutting costs after two decades of deflation.”
Despite confidence being bolstered with Greek debt issues seemingly solved, investors still pulled $900 million from the region’s equity funds.
Last week some $4.5 billion was withdrawn from money market funds, the bank said, bringing the total outflow for the year to almost $42 billion.
Investors were still keen on fixed income, however, with $7.8 billion moving into the asset class – making the 15th straight week of inflows and taking the total taken in this year to over $66.6 billion.
This may change though, as returns have fallen to record lows. Thomson Reuters said this morning that the average coupon for Euro denominated corporate debt issued in 2012 was just 4.53%, the lowest annual average coupon the sector has ever seen.