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Reassessing bonds' impact on equity market moves; Investors' DFM exodus accelerates again

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Molehills

Last week we wrote that tech stocks’ fall from grace has been somewhat exaggerated. The Nasdaq returned 1 per cent for UK-based investors in the first quarter, compared with the S&P’s 5 per cent. There’s been a decent amount of intra-day volatility, but investors aren't at panic stations just yet.

We also noted some analysts reject the idea that tech’s fate is bound up with bond yield movements – however closely correlated the two have proven in recent weeks. To this group of naysayers we can now add the BlackRock Investment Institute: it says fundamentals, structural shifts and technical factors will all help the sector.

On the first point, the firm notes that trailing earnings for the global tech sector have been higher than any other over the past five years. Structural shifts will support that growth in future, even as other sectors recover – the point being that the push towards digitisation and a greener economy aren’t going away.

And on the technical side of things, BlackRock notes that MSCI’s widely used IT sector definition encompasses not online search and ecommerce giants, but the likes of software and services, hardware and semiconductor businesses.

So the travails of the most prominent tech stocks won’t necessarily weigh heavily on such groupings. After all, bond yields are rising in anticipation of higher economic growth and higher inflation – and some of these sub-sectors have plenty of pricing power at the moment. Those reasons will provide plenty of solace for holders of tech-focused strategies – and underline why discretionary managers, among others, aren’t yet ready to throw in the towel.

Ins and outs

It’s the first day of April, which means retail fund flows for, er, February can now be analysed in full for the first time.

By investment industry standards, this kind of lag's par for the course. There are those trying to do things more quickly: Calastone’s own February estimates were published more than three weeks ago. But that data doesn’t always tally with the Investment Association’s own figures.

Today’s data gives no support to the earlier assertion that UK equity funds saw a revival in interest in February. Not for mainstream strategies, at least – small-cap funds saw a surge in flows, but UK All Companies redemptions were at their highest level since last June, and UK Equity Income had one of its worst months on record.

In the fixed income space, there were signs of investors reacting to the spike in sovereign bond yields, but only when it came to overseas holdings. A £1bn net outflow from funds in the Global Bonds sector stands in sharp contrast to a resilient £190m inflow for UK gilt strategies. The odds are against that disconnect persisting once March’s figures are in.

Finally, there was yet more evidence of clients’ ongoing shift away from holding their assets direct with a DFM. Gross inflows remain stable, but on a net basis February saw £1.45bn in assets leave discretionaries’ coffers. That was comfortably the highest figure since last March’s £2.3bn outflow.

This is partly due to investors’ shift to DFMs lower-cost, on-platform options. Might it also have a seasonal element? Last March was a bad one for risk assets, which could well explain the drop there. With no such drama this year, we’ll have to wait for next month’s data to examine whether investors really are using the end of the tax year to reassess how wealth managers run their money.

Boom boom

The merger and acquisition rush continues: the total value of M&A deals stood at $1.3bn in the first quarter of 2021, according to Refinitiv, the second-highest quarter on record and up 93 per cent year-on-year.

Viewed a different way, the acceleration isn’t quite so steep. The number of deals made on the quarter rose just 6 per cent from a year ago. But recent months have seen a huge leap in the number of Spac deals in particular, which has fuelled the sense that the US market is red hot – or possibly overheating.

For now, the environment is a potent one for equity investors, and the operating environment – one of low base rates and a sense that there are few other places for investors’ money – is unlikely to change any time soon.

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