Investors are pouring into global equity funds with a fervour never seen before.
About $580bn has been added to the sector in the first half of 2021, putting the category on track for a record inflow, according to data provider EPFR.
Strategists with Bank of America estimate that if the pace of inflows continues at the same clip for the remainder of the year, equity funds will take in more money in 2021 than in the previous 20 years combined.
Equity funds have ploughed those inflows into an ever rising stock market, with major indices climbing to a series of record highs in the past week as the economic recovery from the pandemic gains momentum. The S&P 500 is up more than 15 per cent this year, while the FTSE all world index has gained slightly more than 12 per cent.
Relatively low bond yields — and the fact that more than $12tn-worth of debt trades with a yield below zero — have amplified the appeal of the $117tn global stock market.
“There been a real seismic change in the economy and where the earnings growth is coming from,” said Diane Jaffee, a portfolio manager with asset manager TCW. “Even with the most conservative estimates of inflation, your real return on bonds is negative.”
The inflows have been broad based, with large additions to both global funds as well as funds that buy US, Japanese or European stocks. Investors have in recent weeks also shown a preference for both growth and technology stocks in the US, as they debate how long inflation will remain elevated and whether the so-called reflation trade will continue to wobble.
Additions to sovereign bond funds have, by contrast, been relatively muted this year at $33bn, the EPFR data showed.
Jaffee said she expected investors to continue to favour stocks this year, particularly those in the US where the country has rolled out Covid-19 vaccinations at a much faster pace than most developed markets. But she and others have warned that a jolt to bond yields — for example from a policy mis-step by the US central bank — remain the big risk.
“While we’re at little risk of overtightening just now, the policy miscommunication issue is very much on the table,” said Nicholas Colas, the co-founder of DataTrek.
Colas noted that US stocks did well even in the aftermath of the 2013 taper tantrum, when the Federal Reserve chair prompted market volatility by saying the central bank would at some point curtail its bond-buying programme.
But Colas added: “While the 2013 taper tantrum period was fine for stocks, we can’t entirely discount the possibility that this time could be different.”