One of the reasons why we like to apply a macroeconomic approach to our analysis is because it forces us to try to understand the global situation and not just what surrounds a company or its sector. This is especially useful in moments like the current one, where it may seem that many companies in an industry, range of market cap or even an entire geography are cheap. And while our analysis of the company may be correct, it is even truer that if money does not enter that market, the company can remain equally cheap, or even cheaper, for long periods of time.
Currently, with a high interest rate environment compared to the last 20 years, fear of a potential recession, the collapse of several regional banks in the US, an impending energy crisis, and all that in the aftermath of the largest quantitative easing program in history,… it is crucial to analyze and understand where the money is flowing in order to configure the portfolio and not remain constantly frustrated because my companies or ETFs are underperforming. (and we are not only talking about sectors or geographies within Equities, but also about money flows among different assets)
Summary of the year in the markets so far
After a challenging 2022 in the markets where the main indices fell by around 30% and the energy sector was the only one that managed to escape the burn, the opposite is happening in this 2023. However, we are observing that the appetite for equities is significantly lower than the average of recent years, and money is preferring debt, as is usually the case in years of high economic uncertainty.
In terms of assets:
Bond inflows are exceeding equity inflows in 2023 ( i.e. April (+$66 Bn vs +$45 Bn – which are significantly below the historical average (-34% for this period of the year)). Furthermore, we are observing that the vast majority of inflows into equities are passive, going into the main index and significantly driving the growth of mega-cap companies compared to small-cap companies. In general, there is very little money flowing into equities, and specifically, the US market is dragging down the global total compared to Europe and Japan.