Although emerging markets managed to buck the trend, riskier assets such as equities, property, and mixed asset funds have seen record outflows in the second quarter of 2023.
Calastone’s latest Fund Flow Index has found outflows totalled a net $2.8 billion in Q2, the worst quarter for managed funds since it started compiling the numbers almost five years ago.
Equity funds saw the largest outflows at $1.65 billion between April and June, with global equities bearing the brunt of selling at some $1.5 billion. In comparison, domestic equities saw net outflows of $59 million.
Despite this downward trend, emerging market equities saw some respite with $4 million in inflows.
Looking at other asset classes, property funds saw their worst quarter on record, shedding $173 million. Mixed asset funds, which tend to be heavily weighted towards equities, saw record quarterly outflows of $544 million.
Calastone’s managing director of Australia and New Zealand, Teresa Walker, highlighted how these outflows could be representative of investors losing confidence in global markets.
“Australia-focused funds have seen remarkably little selling yet this country is not immune to today’s global trends,” Walker said.
“The RBA has hiked rates aggressively to tamp down inflation and is content to generate Australia’s first recession in a generation (barring the initial COVID-19 shock) if it is necessary to achieve its ends.
“In the short term, banks, which dominate the ASX, benefit from rising interest margins, but recessions are costly for banks, too, if non-performing loans increase, so there is no particular reason to favour the Australian market more than those elsewhere at present.”
Looking at emerging markets, she noted the actual cash invested in Q2 was admittedly small but remains significant against the backdrop of large outflows from other equity funds.
She said: “Investors are attracted by relatively low valuations and the benefits to emerging markets both of a weakening US dollar and of the impending turn in the credit cycle.
“As part of the emerging market story, China’s economic recovery from zero-COVID may have disappointed everyone so far, but investors are hoping the government will step in with renewed stimulus to spur the economy back to life.”
Compared to riskier assets, fixed income funds saw net inflows of $582 million even as they offered attractive yields at present. Calastone noted that June’s shock rate rise from the RBA pushed bond prices down, slowing down inflows.
Year to date, investor inflows to fixed income holdings stand at some $1.25 billion.
Fixed income funds have not looked so attractive since before the global financial crisis, Walker observed.
“At the same time, the recession fears stalking equity and property markets are making investors nervous. The result is a flight to safety,” Walker said.
“Short-dated fixed income funds currently enable investors to earn an income of 4.4 per cent or more at very low risk. Meanwhile the 10-year Australian bond yield has jumped from 3.1 per cent to 4.0 per cent in three months.
“Fixed income funds which invest in longer-dated bonds like this now offer the chance to lock into the highest yields in years. They now offer both income today and the prospect of capital gains when the credit cycle turns and market interest rates fall back.”
Cash savings rates are also “at their most tempting in years”, Walker added, with some deposit accounts offering as much as 5 per cent.
For the first quarter of 2023, Calastone reported equity funds saw outflows of $516 million, the highest proportion since the start of the pandemic.
