You know that whole ‘stocks are dead, long live bonds‘ meme?
Interesting factoid from a Morgan Stanley strategy note on Monday:
In the US, the current pace of inflows to bond mutual funds is even greater than retail inflows into equities during the TMT bubble. In the 12 months leading up to September 2000, US equity funds saw cumulative inflows of $340bn. In the equivalent period up to April 2010, US bond funds recorded net inflows of over $410bn. If we look at the weekly ICI data, US equity funds have seen 20 consecutive weeks of outflows since May. We have to go back as far as 2005 since we last observed a month of outflows from US bond funds.
And there’s much more of historical — historic, even — interest in the note. Not least because we reckon it helps get across the essential point that equities were ‘dying’ well before the crisis.
As far as Morgan Stanley are concerned, they reckon there are plenty of factors to support equities in the next year or so, such as short-covering from hedge funds, and buybacks:
But the secular bull is more uncertain. From Morgan Stanley’s charts, it would appear many institutional investors won’t be rushing back to the party, having largely prepared for low equity exposure some time ago — or there are signs that institutional equity holdings don’t have much further to fall.
At any rate — the charts. Here’s a UK-themed taster (click charts to enlarge):
With similar trends among European institutional investors:
And their US counterparts:
None of which may be entirely surprising, but it’s worth reminding of the tectonic institutional shifts against equities — such as stocks’ lack of appeal under the capital requirements insurers face in Solvency II, or the rise of defined-contribution pension funds in the US, which also appear to be less interested in stock investments. Historic, as we said.
In any case, wherever stocks go from here, Morgan Stanley note that the links between stock and bond investments have grown as well:
A combination of a) the outperformance of debt over equity markets and b) greater issuance of debt securities means that the relative size of these markets has changed dramatically over the last decade. At the peak of the TMT bubble, the size of developed market debt and equity markets were almost identical.
Ratio of size of US equity market vs treasuries now below long-run average. The cumulative value of the US equity market against the size of the market for US treasuries also tells an interesting story. In 2000, the equity market reached an unprecedented 6x the size of US treasuries. At the end of August this had fallen to less than 2x.
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The sleeping sentinel?
None of the above is massively cheering for secular bulls. There’s one intriguing possible future for equities to consider, however — sovereign wealth funds.
As Morgan Stanley note, SWF investments in stocks have, in aggregate, barely got off the ground:
Global SWF AUM amounts to almost $3.8tn or around 4% of institutional assets. Although SWF assets are projected to grow by ~50% by 2010, assets under management are still an order of magnitude smaller than either of pensions funds, mutual funds or insurance funds.
Between 2007 and 2009 Sovereign Wealth Funds invested a total of $81bn in European markets. Although SWFs do have the potential to become an incremental buyer of equities, investments to date have represented a relatively small proportion of market cap. In the last three years, cumulative investments in European markets has amounted to less than 1% of market cap.
But it’s interesting to note that even this relatively small expansion into equities has had a wrenching effect on SWF strategies and institutional forms themselves.
Sovereign funds that seek long-term returns above national economic growth have had a hard time adjusting to volatility in western stock markets, for instance — and that might just encourage a future shift from western-style asset allocation and into a new era of strategic investment.
And then no one would be equities’ friend. Sad.
Full note in the usual place.
Related links:
James Montier on the bond bubble – FT Alphaville
Desperately seeking income - FT Alphaville
LSE volume watch – FT Alphaville