A similar trend was visible in China, too, last week where inflows from domestic investors hit a six-month high of $27 billion. What explains the differing appetite between local and global investors in the world’s two biggest economies? These are the edited excerpts of a conversation with Cameron Brandt, Director of Research at EPFR Global.
Q: Could you give us a sense of what is happening? It looks like money is leaving US assets.
A: In many ways, the greatest concern seems to be reflected in the fixed-income space. Equity flows have been somewhat bipolar. The US and China both saw very large inflows last week, though, arguably, a lot of that had to do with technical factors. There has been some of the reaction you would expect. Money market funds, especially in Europe and emerging markets, have seen strong flows. Gold funds have done well, but it was bond funds that took the punishment last week, and that included US bond funds.
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People are still searching for a narrative that they can hang their hat on, but certainly on the equity side, there is a sense that the bond market will impose some kind of discipline on the current US administration. There continues to be faith, misplaced or not, that all of the sound and fury about tariffs is still something of a negotiating position. When the dust settles, things won’t be as far from the old normal as they might appear right now.
Q: Just to press a little more on this point on bonds, because that seems to be what shifted President Trump’s mood, right? And then, after announcing that 90-day pause, he sends out that—he sends out that—he said, “Oh, now the bond market is beautiful.” But can you give us some more details about what this kind of outflow was? Where was the money moving out from, as it moved out from US bonds? And there’s a lot of chatter around—we don’t know for sure, but one of the theories is that maybe China or some of these large other trading partners, maybe Japan, were dumping some US Treasuries, and that kind of forced the administration’s hand.
A: To put it stronger than a guess, we saw just before Trump’s decision that foreign-domiciled US bond funds had their first sort of serious outflow in quite some time. And for the administration, that was a real warning that foreign appetite for US debt, which has to hold up to finance these huge deficits, might be beginning to crack. So, almost simultaneously with that, we saw the 90-day pause.
Q: What about Indian equities? The FIIs have been sellers. They slowed off a little bit. In March, we saw some mild inflows as well. What is your reading in terms of flows to India?
A: India was starting to move back into the picture. The pattern you just described is what we have seen in the fund flows. It’s a little bit of a forgotten market at the moment, but that is true of almost every market in the world, outside the two sides of the major trade dynamic that everyone’s worrying about: the US and China.
But the narrative that brought fund flows back into India last month certainly continues to be evident in the fund research that I read. The Indian market is somewhat protected from this because of the relatively low exposure to global trade. India’s market has corrected to more active levels. The policy environment, especially in comparison with ours, sounds very rational and mildly stimulatory.
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So, we did see mild outflows again last week after three straight weeks of inflows. But, I think when people can focus, they see that India is still not soaring the way it did for the two years into the fourth quarter of last year, but investors and fund managers are certainly warming back up to the Indian story.
(with input from Elara Capital)
For the entire interview, watch the accompanying video
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