Coronavirus fight helps lift global equity funds

Global equity funds notched their second straight week of inflows after suffering from a string of outflows, as nascent signs emerged that the spread of coronavirus was being curtailed in parts of the US and Europe. 

The shift by investors has helped support an intense 25 per cent rally in US stocks off their March lows, including the best weekly gain by the benchmark S&P 500 since 1974. The inflows followed repeated intervention by policymakers to stabilise financial markets and stimulate economic activity.

Portfolios investing in global equities pulled in $18bn for the week ending Wednesday, more than double the $8bn in inflows seen in the previous seven days, according to EPFR Global data.

For the five weeks ending March 25, investors yanked a cumulative $94bn from global equity mutual funds and exchange traded funds, as volatility erupted across financial markets and the economic fallout from the coronavirus outbreak began to take shape. Investors instead flocked to short-term government bonds and other cash-like products, fuelling record inflows into money market funds. 

The equity inflows preceded the Federal Reserve’s announcement on Thursday that it would provide an extra $2.3tn in loans to support small businesses and municipalities struggling because of the coronavirus outbreak. As part of the plan, the central bank also expanded its involvement in corporate debt markets, giving itself the authorisation to buy riskier junk bond exchange traded funds. 

“What the Fed is doing is pretty incredible,” said Jon Adams, senior investment strategist at BMO Global Asset Management. “They are taking proactive action and really pushing the limits of monetary policy. And, they’ve put a floor under risk assets.”

Since trading conditions deteriorated and turmoil erupted across financial markets last month, the Fed has stepped in repeatedly to stabilise certain asset classes, including efforts to shore up the markets for US Treasuries, agency mortgage-backed securities and commercial paper.

Further bolstered by a historic $2tn relief package from Congress, investors have pumped stock valuations higher, prompting warnings from top strategists at Goldman Sachs, JPMorgan Chase and Citigroup who believe a new wave of declines could be on the horizon. 

Line chart of Cumulative outflows from global equity funds since 2019 ($bn) showing Investors begin to return to global stock funds

The Fed’s decision on Thursday to buy riskier assets took many investors by surprise. Up until the announcement, it had limited its interventions to higher-rated securities, which had helped to reinvigorate investment-grade credit markets. 

“The Fed has crossed the credit Rubicon,” said David Lafferty, chief market strategist at Natixis Investment Managers. 

The central bank has repeatedly signalled it is willing to extend its reach even further if economic and financial conditions warrant, helping to fuel optimism among investors that the worst of the economic hit could soon pass.

“The market has already been responding to the prospect of a recovery,” said Alex Tedder, head of global equities at Schroders. “What the Fed has done is to add further support to the view that this downdraft will be temporary and the economy will bounce back in the second half of the year.”

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