There are many portfolio managers who suggest they pay more heed to the micro rather than macro of the companies in which they invest through equity, debt and other instruments – and yet the world’s biggest economy is facing inflationary headwinds not seen since the 20th century with midterm elections looming.
For fund managers who cut their teeth in an era of ever cheaper money (falling interest rates) in recent decades, the present environment presents a conundrum. Perhaps that is why recent Refinitiv Lipper data for European fund flows highlighted some of the biggest inflows and outflows in USD denominated classifications of funds.
Bond categories dominated net sales in the month, of which the Bond USD and Bond USD Government categories were among the top five best sellers. Current economic conditions and the inflation-fighting measures of central banks have clearly influenced buying and selling activity, and one would assume will continue to do so.
The combination of higher interest rates in the US and fears of lower economic growth or even recession globally have seen the dollar surge against other key currencies in the past 12 months. At the same time, industry commentators commonly note that UK companies are on sale cheap thanks to the weak pound. Team this with historically high levels of ‘dry powder’ in US private equity funds, and we would expect the UK to attract a lot of interest. This interest should be bolstered by Rishi Sunak’s position as Prime Minister – he is likely to have a much more ‘conventional’ relationship with institutions such as HM Treasury, the Office for Budget Responsibility and the Bank of England.
While the dollar/pound rate opens up opportunities for eagle-eyed private markets investors, elsewhere, crypto has become far less sexy for those looking to the extreme spectrum of alternatives.
Many highly intelligent people are involved in the mathematics and technology of cryptocurrencies, but what they all lack is a central bank standing behind them. So-called Central Bank Digital Currency (CBDC) is a hot topic at the Fed and its peers, but they are yet to commit. Recent data from CoinMarketCap suggests cryptocurrencies such as Bitcoin and Ethereum, i.e. not CBDC, collectively lost more than $1.9 trillion in value since the peak of a rally last year, meaning the dollar as a store of value has not only risen against other key fiat currencies issued by other central banks, but also against crypto.
All of this means that the Fed seems to matter more than ever, not only in the United States itself but also for investors on this side of the Pond. Of course, the moves of the European Central Bank (ECB) will also influence fund flows in the coming months. In a recent interview, Christine Lagarde confirmed the ECB’s commitment to continued rate raises to rein in inflation.
It is fundamental for asset managers to understand how professional investors are responding to such central bank activity. The second annual wave of Research in Finance’s European Fund Selector Study (EuroFSS) will be asking investors where they plan to invest in the coming months and whether they prefer to use active of passive strategies to achieve their objectives.