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Article25 Feb 2022

In Equities, Rotation Is the Name of the Game

A new report from Citi Research’s David Groman looks at the fund flows driving three recent rotation trades.
Some key themes are emerging in global markets this year. Central banks are turning more hawkish, and bond yields are rising. Highly rated stocks have been vulnerable. Value stocks are holding up better. Citi analysts, in a new report, look at three rotation trades and what is behind them 

Rotation #1: Bonds to Equities 

Bond funds are on track for two consecutive months of outflows ($32bn or 0.4% of AUM YTD), according to data from EPFR. Over the same period, equity funds have recorded $153bn (0.9% of AUM) of inflows, split roughly 80%-20% between developed and emerging markets.  

Even as investors piled a record $913bn of flows into equities last year, the cumulative $850bn switch into equities since 2007 still looks low compared to $4trn into bond funds.   

Predictions of a “Great Rotation” away from bonds back towards stocks are not new.  After decades of falling yields, the question is when will conditions finally be in place for a more sustained upturn in the global rates cycle and subsequent flows out of bonds?  

Global Bond and Equity Monthly Flows ($bn)

Cumulative Bond and Equity Flows ($bn)

Figure 2. Global Bond and Equity Monthly Flows ($bn) Source: Citi Research, EPFR If you are visually impaired and would like to speak to a Citi representative regarding the details of the graphics in this document, please call USA 1-888-800-5008 (TTY: 711), from outside the US +1-210-677-3788.

Figure 2. Global Bond and Equity Monthly Flows ($bn) Source: Citi Research, EPFR If you are visually impaired and would like to speak to a Citi representative regarding the details of the graphics in this document, please call USA 1-888-800-5008 (TTY: 711), from outside the US +1-210-677-3788.

© 2022 Citigroup Inc. No redistribution without Citigroups written permission.

© 2022 Citigroup Inc. No redistribution without Citigroups written permission.

Source: Citi Research, EPFR

Source: Citi Research, EPFR

 

Rotation #2: US to Ex-US 

Most equity fund categories have seen inflows this year, despite the MSCI AC World trading 6% lower. This is a rare occurrence historically, as such a fall in equities would typically be associated with outflows. 

There’s evidence of US to ex-US rotation in so-called “Global” funds, which can be split into those including the US and those excluding the US. Flows into ex-US funds have outpaced US-inclusive funds for seven of the last eight months, as a percent of AUM. Investors do seem to be diversifying outside the US but were already doing so before this year’s underperformance. The shift in flows still seems small compared to the prior preference for the US-inclusive funds 

Monthly Equity Flows by Region (% AUM)

Monthly Flows in Global Funds Incl. US and Ex-US (% AUM)

Figure 4. Monthly Equity Flows by Region (% AUM) Source: Citi Research, EPFR If you are visually impaired and would like to speak to a Citi representative regarding the details of the graphics in this document, please call USA 1-888-800-5008 (TTY: 711), from outside the US +1-210-677-3788.

Figure 5. Monthly Flows in Global Funds Incl. US and Ex-US (% AUM) Source: Citi Research, EPFR If you are visually impaired and would like to speak to a Citi representative regarding the details of the graphics in this document, please call USA 1-888-800-5008 (TTY: 711), from outside the US +1-210-677-3788.

© 2022 Citigroup Inc. No redistribution without Citigroups written permission.

© 2022 Citigroup Inc. No redistribution without Citigroups written permission.

Source: Citi Research, EPFR

Source: Citi Research, EPFR

 

Rotation #3: Growth to Value 

Over the past few months, cheaper value stocks have strongly outperformed their more expensive growth stock peers. Since last November, MSCI’s global value index has traded sideways, while the growth index has fallen around 10%. Has this been driven by fund flows? The answer, according to Citi analysts, is yes – sort of. 

Flows into growth and value strategy funds, as tracked by EPFR, provide evidence that investors are indeed moving towards value, with seven consecutive weeks of inflows dating back to December of last year. This has been accompanied by six straight weeks of growth outflows to start this year. However, value inflows in 2022 are still small in comparison to those during the early-2021 value rally. Indeed, cumulative flows into value funds reached $70bn around last year’s rotation, compared to this year’s $23bn inflow. 

Citi analysts also aggregate sector-based fund flows, categorizing Tech as growth and the combination of Energy, Materials and Financials as value. Flows into the value sector funds ($15bn or 2.8% AUM YTD) have outpaced those into growth sectors ($4bn or 0.8% of AUM YTD).  

Monthly Flows in Growth/Value Style Funds ($bn)

Cumulative Flows in Sector Funds ($bn)

Figure 6. Monthly Flows in Growth/Value Style Funds ($bn) Source: Citi Research, EPFR If you are visually impaired and would like to speak to a Citi representative regarding the details of the graphics in this document, please call USA 1-888-800-5008 (TTY: 711), from outside the US +1-210-677-3788.

Figure 7. Cumulative Flows in Sector Funds ($bn) Source: Citi Research, EPFR If you are visually impaired and would like to speak to a Citi representative regarding the details of the graphics in this document, please call USA 1-888-800-5008 (TTY: 711), from outside the US +1-210-677-3788.

© 2022 Citigroup Inc. No redistribution without Citigroups written permission.

© 2022 Citigroup Inc. No redistribution without Citigroups written permission.

Source: Citi Research, EPFR

Source: Citi Research, EPFR

 

For now, a modest rotation only 

Long term, capital flows (into all bonds, US equities, growth stocks) have driven the dominant investment themes of recent years. This has pushed the valuation gaps between bonds/equities, US/RoW equities, and Growth/Value to extremes. Tentative signs are emerging that these trends may be reversing. Plenty of capital is still available to drive further rotation. For example, the latest shifts have done little to close the wide long-term gaps between equity/bond inflows or growth/value stock PEs. As Citi analysts conclude: This remains a “Small Rotation”, for now at least.  

World Earnings Yield vs Bond Yield (Market Cap Weighted)

Relative PEs: Value vs Growth, US vs Ex-US

Figure 8. World Earnings Yield vs Bond Yield (Market Cap Weighted) Source: Citi Research, DataStream If you are visually impaired and would like to speak to a Citi representative regarding the details of the graphics in this document, please call USA 1-888-800-5008 (TTY: 711), from outside the US +1-210-677-3788.

Figure 9. Relative PEs: Value vs Growth, US vs Ex-US Source: Citi Research, DataStream If you are visually impaired and would like to speak to a Citi representative regarding the details of the graphics in this document, please call USA 1-888-800-5008 (TTY: 711), from outside the US +1-210-677-3788.

© 2022 Citigroup Inc. No redistribution without Citigroups written permission.

© 2022 Citigroup Inc. No redistribution without Citigroups written permission.

Source: Citi Research, DataStream

Source: Citi Research, DataStream

 

For more information on this subject, please see Global Equity Strategy - The Small Rotation published on February 16th 

Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here. 

 

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