As Darren Winters explains, Capital flows could be holy-grail of forecasting future asset prices
With 2018 being a challenging year for investors let’s then take a look at which assets received positive and negative capital flows that year.
Market volatility was high in 2018. An escalating trade war, growing geopolitical uncertainties and not to forget the Fed’s move to monetary normalization all resulted in the S&P ending in negative territory for the first time in 10 years.
Exchange Traded Funds (EFTs) attracted the lion’s share of capital flows in 2018 with $238.4 billion of capital pouring into EFTs
See the chart entitled visualizing fund flows in 2018
An ETF is a cross between a mutual fund and a stock. A mutual fund pools money from multiple investors to invest in a portfolio of stocks, bonds, and other investable assets.
ETFs enable investors to buy a small slice of a portfolio of stocks, bonds, or other investable assets.
So ETFs were hot in 2018 receiving the most capital flows due to their portfolio diversification, risk management, lower costs, and tax benefits.
By contrast with ETF Mutual funds lost $91.3 billion of capital in 2018.
Mutual funds actually had a net positive capital flows on the year of about $12 billion until investors sold them off in December.
During the year, a net amount of $192 billion flowed into funds, bringing the total assets invested to $19.7 trillion.
Despite growing for another year ETFs still make up a small part of the fund universe overall.
In 2018 capital flows totaled $3.4 trillion for ETFs and Mutual funds it is $16.4 trillion
What about the flow of capital in 2018 by asset class?
US equities amounted to $7.2 trillion. For taxable bonds, it was $3.7 trillion. Money Markets received $2.9 trillion and international equities received $2.8 trillion.
Commodities received $0.9 trillion of capital flows.
So investors rotated into money markets and taxable bonds in 2018. The following sectors received negative capital flows in 2018.
Investors pulled money from allocation $1.2 trillion, alternatives $0.2 trillion and sector equity funds.
Capital flows into precious metals gold funds jumped in December to nearly $1,500 mm.
Investors also favored funds focused on China which experienced a 35.5% increase in capital flows. But investors ditched funds that were exclusively focused on India negative 10% capital flows and particularly Europe down a significant 23.4 %.
So based on capital flows, European assets are in trouble, China looks good. Precious metals, particularly gold could also shine again in 2019 and US equities look promising so too ETFs.