As the second quarter neared its close, investors adjusted allocations, with a notable rotation out of equities and into safer assets such as government bonds or cash, according to flow data compiled by Bank of America Merrill Lynch.
Much of the repositioning was driven by changing environment: tighter Federal Reserve monetary policy, rising energy prices, geopolitical tensions and growing protectionist policies across the globe.
In the week ended on Wednesday, investors withdrew nearly $30 billion from global equity funds, which was the second largest weekly outflow on record, the BAML analysts said in a Friday note.
The biggest chunk of equity outflows came from U.S. equity funds, where investors withdrew $24.2 billion over the past week, the third largest outflow ever.
Investors took $3.9 billion out of European equities, while Japan saw inflows of $2.6 billion.
Outflows came from all styles of stocks: growth, value, large-cap and small-caps, BAML said. Only two categories saw inflows: tech stocks and cash. Tech funds saw $19 billion of inflows, compared with $9 billion outflows from all other sector funds. Meanwhile, money-market funds took in $27 billion over the last week.
Merrill Lynch said its private client allocations show a surge in T-bill holdings rose to 10-year high, as seen in the chart below.
Investors, who flocked into emerging market equities and bonds at the beginning of the year, appeared to have given up on them since May.
Redemptions from emerging market assets were $8 billion in May and $18 billion in June, though they still pale in comparison to outflows in 2008 and 2015, according to BAML.
Riskier bonds continue to be unpopular with investors with the eighth straight week of outflows from high-yield bond funds and 10th straight week of emerging market bond outflows.
Instead, investors bought municipal bonds—$0.4 billion, government bonds, including Treasurys — $0.9 billion and Treasury inflation-protected securities or TIPs—$0.4 billion.
However, BAML’s broad asset allocation is still risk-on, with cash at a record low 9.9% and equities at 61.1% (close to the 62.5% all-time high).
The current environment of a flattening yield curve, collapsing emerging markets and outperforming levered quant funds are “all echoes of 1998,” BAML analysts wrote.
“1998 Asia/LTCM was a perfect example of late-cycle global credit event inducing market crash and deleveraging,” they said.
The benchmark S&P 500 SPX, +0.08% has gained 3.4% over the past quarter and 2.1% since the start of the year. Meanwhile, the yield on the 10-year Treasurys TMUBMUSD10Y, +0.77% has gained more than 40 basis points year to date to trade at 2.85%.
