Safe Haven Shelter In A Dichotomising World
By Rudi Filapek-Vandyck
What just happened?
US$5.9bn in global investment funds said goodby to dedicated Emerging Markets equity funds during the week ending June 20, 2018. After several weeks of steady outflows, last week marked the largest weekly funds outflows for EMs since September 2015, when things looked genuinely bleak on the back of Fed tightening, USD strength and a relentless five-year down-cycle for commodities.
Equally noteworthy: US$4.7bn of EM outflows stems from ETFs (passive investment products), while EM bond funds reported outflows of US$1.2bn and Japan-oriented funds saw outflows of US$2.9bn. All the while, EU equity funds have now witnessed 14 weeks of net funds outflows; the second longest streak since 2010.
In other words: globally, investors are turning more cautious on the synchronised global growth story that has dominated views and asset allocations since late 2016. Throughout 2018, 'synchronised' has steadily turned into 'de-synchronised' with corporate profits and economic progress in the US looking healthy and strong, but with momentum elsewhere deflating.
With the Federal Reserve turning more hawkish, and the US dollar rediscovering its mojo, a number of global strategists are reviewing their exposure to Emerging Markets, traditionally viewed as beneficiaries of a weaker greenback.
This year's weakness in Asian share markets, including in China, coincides with weakness in European markets and quite a number of equity strategists are now weighing up the prospect that these markets might have peaked for the time being, which then justifies reduced exposure and a more cautious/defensive portfolio composition.
This year's divergence among global equities has been captured in the chart below, thanks to Longview Economics.
What is not included in Longview's chart is that Australian indices have become unexpected beneficiaries from the global rotation, even with the Australian dollar losing more than US2c in two weeks. Traditionally, foreign funds tend to avoid the ASX when the Aussie is facing weakness as it erodes the value of their allocated funds when translated back in the original currency. Somehow this hasn't been the case this time around.
AUD/USD rallied above 81c in January, then fell and range traded between 76-78c, before falling below 74c last week. Yet major equity indices have rallied beyond their early January high and are setting new post-GFC record highs.
The Australian share market, traditionally seen as a benchmark for global growth and risk appetite, has turned into a safe haven for global investors worried the US might become the last one standing tall when all others are starting to reveal their weaknesses.
Just how healthy and sustainable things are in the US remains an ongoing topic of public debate. One thing cannot be denied and that is that corporate profits and economic data and indicators post Trump tax cuts thus far are truly standing out in a world that is increasingly revealing its dichotomy.