For all those data geeks out there like us, analyzing fund flow data can be an incredibly interesting and revealing exercise. So much so, that we devoted another blog to the topic. Regular readers might have caught last week’s blog in which we highlighted the massive divergence of YTD net flows between International Equity and U.S. Equity ($60.7 billion of inflows vs. -$58 billion of outflows, respectively, for mutual funds, both active and passive, through Q2). The data appeared to suggest that U.S. equity investors were diversifying their domestic exposure overseas. If that is true, then where is the money going? Where are investors seeing opportunity in the international markets?
Throughout the first half of 2018, we have seen a massive divergence in fund flows as International Equity has dominated U.S. Equity. As we can see in the table below, International Equity has attracted $60 billion in positive net flows YTD across all mutual funds, both active and passive strategies; U.S. Equity on the other hand, has lost an almost identical amount, posting outflows of -$58 billion. On the surface, it appears that many U.S. investors have reallocated some of their domestic equity exposure overseas.
Remember when Strava, the fitness tracking app, gave away the location of secret U.S. army bases in Afghanistan and Syria? We wrote about it back in February. It was an embarrassing and dangerous leak of sensitive customer data. It also highlighted the intrusion and potential abuse of location-based cell phone data.
Well, good news for cell phone users in the United States – they got a couple of small wins:
There has been a lot of focus recently on the yield curve. For the purposes of this blog, we define it as the spread between 10-year US treasury yields and 2-year US treasuries.
Today it is tracking at ~30 bps, the tightest it’s been since the Financial Crisis.
One would typically expect a positive yield spread since a 10-year instrument has higher risk than a 2-year instrument. For example, investors should demand a premium yield for 10-years vs 2-years. Historically, this spread has averaged 100bps, with a range of roughly -100bps to +300 bps (see chart below).
The new regulatory requirement of MiFID II has been in effect for six months and it appears to be working. This recent Bloomberg article really caught our attention as it highlights an astonishing +70% increase in the reported trading volumes for European ETFs.
There have been numerous academic studies on the economic benefits of hosting the World Cup. A few, out of a long list of studies, can be found here:
- The Economic Impact, Costs and Benefits of the FIFA World Cup and the Olympic Games: Who Wins, Who Loses?
- Russia predicts World Cup will have $31 billion economic impact
- Economic Impacts of the FIFA World Cup in Developing Countries
Infrastructure spending, increased tourism (both short- and long-term), higher labor/civic morale, and increased profile of the host country are often cited as the benefits. On the other hand, the cost of building (and financing) the stadiums, crowding out of private investment, congestion, and the cost of security are some potential disadvantages.
But as international equity investors, we are more focused on the simple question:
what about the impact on equity prices?
This old chestnut is variably attributed to Henry Ford, John Wanamaker, J.C. Penny, William Hesketh Lever, amongst others. Each one is a great symbol of consumerism, but we’ll never know which or if any of them really said it.
In October, we wrote about the market opportunity in biosimilars, which are generic versions of biologic drugs, also known as biologics. Biologics are molecules made by living organisms such as humans, animals, and microorganisms, which mean they typically have a more complex molecular structure compared to conventional drugs. These drugs can treat a wide variety of diseases and potentially see greater efficacy versus other therapies.
To hedge or not to hedge currency risk, that age-old question for international equity investors just keeps popping up. Admittedly, for U.S. dollar (USD) investors allocating to international equities, this has been a futile exercise as prolonged USD weakness has provided a nice tailwind to returns. However, the period from 2014 through 2016 was a wake-up call for the unhedged investor; ignoring currency risk was no longer acceptable. While international stocks performed well at the local level, currency risk devasted those returns as they were exchanged back into USD.
Here is some potential good news and some potential bad news. The good news – international stocks are not expected to implode anytime soon. The bad news – a correction of 5-10% seems fairly likely. This increasing probability of a near-term correction is supported by the diverging relationship between stock prices and macroeconomic data.