Summary
What the fund flows are telling us
Investors pulled back from equity, bond, money market funds in broad de-risking, favouring cash, alternatives, and consumption. Commodities is a rare exception as search for inflation protection continues. Whilst international equity flows have been resilient, as cheaper, under-owned, and outperforming this year. The biggest outflows were in bond funds as prices have slumped. This may ease with yields now higher.
Concerns shift to recession and earnings
Record 7th down week as S&P 500 flirts with -20% ‘bear’ market. Valuation concern eased, on less 10-year bond yields and inflation expectations. But replaced with rising recession and earnings fear after US retailers from WMT to TGT warned on inflation impacts and consumer demand, and sold off dramatically. Some relief as China cut interest rates. We see fundamentals as stressed but secure. See latest presentation, video updates, and twitter @laidler_ben.
Why bond yields may have peaked
US 10-year bond yields may have overshot by surging over 3% per our copper/gold ratio. Helps our ‘less bad’ view, of peak inflation, interest rate fears, and less valuation pressures.
‘Biggest summer of travel of our lifetime’
Global travel rebounding on pent-up demand and looser restrictions. Depressed international travel leading. Is 10% of global GDP, and 4/5 is leisure. See ETF JETS to @TravelKit
The renewables ‘reality-check’
Renewables recent reality check of rising costs, slow regulations, and valuation pressure, masks the accelerating underlying transition. See ETF ICLN and @RenewableEnergy.
Company change is the only constant
Meta (FB) IPO 10th anniversary a stark reminder of constant creative destruction amongst stocks, as S&P500 index ‘longevity’ halves.
Crypto recovery after stable coin shock
Muted relief rebound after the TerraUSD depeg. Led by select altcoins but have seen a ‘flight-to quality’ with Bitcoin (BTC) ‘dominance’ rising. The near record price correlation with stressed equities remains a big headwind but easing US dollar and bond yields are helping.
Commodities on the front foot
Commodities shrugged off global growth fears as China eased lockdowns and cut interest rates whilst EU delayed boycott of Russia oil. Industrial metals rebounded on China stimulus, and gold buoyed by global equity market volatility. Remain in a commodity market ‘sweet spot’.
The week ahead: global growth and the Fed
1) Fed meeting minutes and ‘peak’ PCE inflation focus.
2) Global ‘flash’ PMI economic growth and inflation slowdown ‘pulse’.
3) Q1 earnings from NVDA, COST, INTU, SNOW with markets very intolerant of misses.
4) World Economic Forum in Davos gathers corporate leaders.
Our key views: Growth concerns rising
Markets seeing biggest sell-off since 2020 covid crash. Risks are switching from valuations to earnings. We see fundamentals as stressed but secure, and ‘less bad’ outlook of peaked inflation and interest rate fears. Focus on ‘barbell’ of cheap Value cyclicals and ‘defensives’: Value, commodities, alongside healthcare, and high dividends. We are cautious on bonds.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | -2.90% | -7.54% | -13.97% |
| SPX500 | -3.05% | -8.67% | -18.14% |
| NASDAQ | -3.82% | -11.56% | -27.42% |
| UK100 | -0.38% | -1.75% | 0.07% |
| GER30 | -0.33% | -1.13% | -11.98% |
| JPN225 | 1.18% | -1.35% | -7.13% |
| HKG50 | 4.11% | 0.38% | -11.46% |
*Data accurate as of 23/05/2022
Market Views
Concerns shift to recession and earnings
- 7th straight down week as S&P 500 flirts with – 20% ‘bear’ market. Valuation concern eased, with bond yields and inflation expectations. But replaced with rising recession fear and earnings risk after US retailers from WMT to TGT warned on inflation impacts and consumer demand, and sold off dramatically. Some relief as China cut interest rates. See Page 6 for Resources guide of reports, presentations, videos, twitter.
Have bond yields now peaked?
- US 10-year bond prices have fallen sharply, and yields doubled this year to 3%. This has driven equity valuations below average, and led the correction. Our updated copper/gold ratio shows yields may have overshot (see chart).
- This supports our ‘less bad’ view, of peaked inflation and interest rate fears. However it risks being replaced by a stepped up recession ‘scare’. This may shift the focus from valuations to earnings, reinforcing traditional defensives from utilities (XLU) to healthcare (XLV) but also maybe select ‘big tech’ Growth. The economic outlook is stressed but secure, and sensitive to easing China covid lockdown fears.
‘Biggest summer of travel of our lifetime’
- Global travel is rebounding on high pent-up demand, lower virus cases and restrictions, and is a relative haven to current market volatility. This may drive ‘the biggest summer of travel of our lifetime’, led by international travel that has only regained a fraction of domestic travel.
- Leisure is four-fifths travel and tourism spend, which is over 10% of global GDP. This is a boost to bigger economies, from Spain to Greece and ‘reopener’ stocks from JETS to @TravelKit. It is also existential for many smaller countries, from the Maldives to Macau, at 50%+ of GDP.
The renewables reality check
- Renewables stocks saw a short green silver lining from the Ukraine crisis, with surging oil incentivizing renewable transition and a refocus on energy security. But sector, from global clean energy ETF ICLN to smart portfolio @RenewableEnergy, gave back gains as fossil fuel stocks continued to storm ahead.
- The renewables reality check was led by rising costs, slow moving regulations, and bond yield valuation pressure. But investor support and long-term adoption is clear and valuations are now inline with NASDAQ’s 4x Price/Sales ratio.
Change is the only constant
- Meta (FB) publicly listed as Facebook 10-years ago in the 3rd largest IPO in US history. The ten fold price surge from its $38 IPO price took it to a 2021 peak market cap. over $1 trillion. But the price has since halved and its 16x P/E valuation is now even below the S&P 500 average.
- This is a stark reminder of the constant creative destruction among even the largest stocks. S&P 500 stock index ‘longevity’ has near halved in recent decades, whilst an oil stock – Saudi Aramco (SAOC) – is now back as the world’s largest, dethroning tech giant Apple (AAPL).
Peak bond yield? Copper/Gold ratio vs US 10-year bond yield (%)
Crypto recovery after stable coin shock
- Crypto assets saw a muted recovery from the prior week’s shock TerraUSD (UST) depeg and Terra (LUNA) price collapse. Bitcoin (BTC) and Ethereum (ETH) have stabilized near their respective key $30,000 and $2,000 price levels.
- Altcoins ADA, SOL, DOT saw some crypto relief rebound, but BTC has benefitted from a ‘flight to-quality’, helping take its market cap. ‘dominance’ of the asset class near 45% levels.
- Crypto assets continue to struggle with the near record high price correlation with volatile equity markets. But other macro headwinds for crypto eased with the ‘safer-haven’ US dollar falling from 20-year highs and ‘competing’ US 10-year bond yields retreating from recent 3% levels.
Commodities on the front foot
- Commodities shrugged off rising global growth fears, helped by 1) Shanghai’ timetable to come out of covid lockdown and the Central Bank again cutting interest rates, and 2) further delays to the EU boycott of Russian energy. The broad Bloomberg commodity index is up over 30% this year, and is the only asset class in positive territory. Commodities are in a ‘sweet spot’ of resilient demand and tight supply.
- Industrial metals, like copper, aluminium plus silver, benefitted most from the lower Chinese growth concerns. Whilst gold saw a rare boost from surging global equity market volatility.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | -3.67% | -13.59% | -27.60% |
| Healthcare | 1.00% | -8.45% | -11.37% |
| C Cyclicals | -6.62% | -21.79% | -30.95% |
| Small Caps | -1.08% | -13.00% | -21.02% |
| Value | -2.29% | -9.73% | -9.96% |
| Bitcoin | -3.21% | -27.32% | -38.77% |
| Ethereum | -5.53% | -36.37% | -47.90% |
Source: Refinitiv, MSCI, FTSE Russell
The week ahead: Global growth and the Fed
- Minutes (Wed) of last Fed meeting shine light on the continued 0.5% rate hike pace ahead of June 15th meeting. Fed’s favourite PCE inflation (Fri) seeing easing to 6.4% in a gradual ‘peak’.
- Global ‘flash’ May PMI’s (Tue) provide timely pulse of pace of the global growth slowdown and stickiness of inflation. US, EU. UK were all at mid-50’s solidly expansionary levels in April.
- Q1 earnings from heavyweights NVDA, COST, INTU, SNOW, MDT.US, plus smaller consumer and housing stocks AZO, BBY, TOL, WOOF with markets intolerant of any earnings misses. Plus have JP Morgan (JPM) analyst day event.
- World Economic Forum annual Davos meet of world and corporate leaders live for 1st time in 2 years. Theme is ‘History at a Turning Point’.
Our key views: Growth concerns rising
- Markets are seeing the biggest sell-off since the 2020 covid crash. Concerns switching from bond yields and valuations, to recession risk and earnings. We see fundamentals as stressed but secure, with GDP supported by strong corporates and consumer and peaked inflation.
- Economies are reopening and growth robust. The aggressive Fed hiking cycle is increasingly well-priced and inflation starting to peak.
- Focus a ‘barbell’ of cheap cyclicals and select ‘defensives’: Value, commodities, and high dividends and healthcare. Cautious on bonds.
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | 1.74% | 1.17% | 31.64% |
| Brent Oil | 1.52% | 6.80% | 44.87% |
| Gold Spot | 1.92% | -4.52% | 0.80% |
| DXY USD | -1.47% | 1.78% | 7.35% |
| EUR/USD | 1.46% | -2.19% | -7.10% |
| US 10Yr Yld | -12.57% | -10.40% | 127.80% |
| VIX Vol. | 1.94% | 4.32% | 70.91% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: Voting with your feet
Investors pulling some money from markets, across board. Commodities and International focus
What investors are buying or selling tells us a lot about sentiment and is a concrete measure, amongst many expectations-only surveys, of what is really going on. Analysing US exchange traded fund (ETF) and mutual fund flows shows outflows across all major asset classes, as investors turn cautious, stockpile cash, and potentially use to support daily consumption. Bank deposits have risen $100 billion. Bond outflows have led and there has been a relative preference for commodities, international equities, and US large caps – in that order. We favour defensives, like healthcare (XLV) and high dividend yield (HDY), and Value equities, such as energy (XLE) and international markets like UK (ISF.L) and Japan (EWJ). These are places to stay invested, for the eventual upturn, whilst minimizing downside risks, to ride out the market storm.
International equities seeing least outflows, as cheaper, under-owned and more resilient this year
US investors have pulled over $100 billion from equity funds this year, focused on the domestic market. Half of this has come in the past six weeks as the sell-off has accelerated. That’s the bad news. The nuances are plenty though. 1) This is only half the outflow seen from bond funds over the same period. 2) It has been concentrated in US small and mid caps, contributing to their underperformance. As flows have a disproportionate impact in smaller asset segments. 3) Whilst large cap flows have been relatively secure. 4) Similarly international flows have been resilient. This fits with the under-owned nature of international markets (after years of under-performance), their lower valuations (when lower valuations is the big risk), and their recent bout of out-performance (boosted by the strong USD). Many major international markets, from UK to Australia and Canada, have significantly outperformed tech-heavy US equities this year.
Bonds seen most outflows, but may start to ease with yields now higher
Bond fund outflows have totalled around $180 billion this year and accelerated in recent weeks, consistent with the worst start this year for bond performance in over a generation. The rare combination of both falling equities and bonds have left few places to hide for investors, with the popular 60/40 portfolio offering little diversification. These outflows may begin to ease with US long term bond yields now looking more attractive. We have seen little new interest in cash proxy money-market funds as risk-aversion has risen and alternative asset returns plunged. This may change in the very near term as risk aversion spikes.
Commodity inflows highlight continued search for inflation protection
The data also highlights the turnaround in commodity flows. It’s the only asset up this year, by 30%, but is small and not well allocated by many. We think commodities remain a safer haven from ‘high for longer’ inflation and is in a relative ‘sweet spot’ of tight supply, resilient demand, and increased investor demand.
US fund flows by asset ($ millions, Accumulated)
Key Views
| The eToro Market Strategy View | |
| Global Overview | Geopolitical risks alongside the Fed hiking cycle is boosting uncertainty and weakening markets. We see this as slowly fading, the global growth outlook secure, and valuations more compelling. Focus on cheap cyclical and defensive assets within equities, like Value, plus commodities, crypto. Relative caution on fixed income and the USD. |
| Traffic lights* | Equity Market Outlook |
| United States | World’s largest equity market (60% of total) seeing strong c4% GDP growth and with room for more earnings upside surprises. Valuations have now fallen back to average levels, and are well supported by still-low bond yields and high company profitability. Fed interest rate risks are now well-priced. See cyclicals and value catch-up, after a decade of underperformance, whilst big-tech is supported by its structural growth outlook. Now see overseas markets leading. |
| Europe & UK | Pressured lower by proximity and exposure to Ukraine crisis. Recession risks rising with Russia impacts and energy crisis. But 1) macro ‘buffers’ of rising fiscal spending (defence and refugees), zero-bound interest rates (‘dovish’ ECB), and weak Euro (50%+ sales from overseas). Equities helped by 2) greater weight of cyclical sectors, and lack of tech, 3) 25% cheaper valuations vs US, 4) decade of underperformance made under-owned. UK favoured over continent. |
| Emerging Markets (EM) | China, Korea, Taiwan dominate EM, with 60% weight, and is more tech-centric than US. China outlook improving as cuts interest rates (opposite of rest of world) reducing slowdown and property sector risks, focuses on stability ahead of 20th Party Congress, and with valuations now 45% cheaper than US and market heavily out of favour. Will support EM, but is exposed to Fed tightening. China recovery also helps global sectors from luxury to materials. |
| Other International (JP, AUS, CN) | Canada and Australia benefit from strong equity market weight in commodities and financials, as global growth rebounds and bond yields set to rise. Japanese equities among cheapest of any major market and vaccination rates accelerating, but has structural headwinds of low GDP growth, an ageing population, and world’s highest debt. |
| Traffic lights* | Equity Sector & Themes Outlook |
| Tech | ‘Tech’ sectors of IT, communications, parts of consumer discretionary (Amazon, Tesla), dominate US and China. Expect more subdued performance as bond yields rise. But are structural stories with good growth, high margins, fortress balance sheets that justify high valuations. ‘Big-tech’ the new defensives. ‘Disruptive’ tech more vulnerable. |
| Defensives | More attractive as macro risks rise and bond yields better priced. Consumer staples, utilities, real estate attractive defensive cash flows, less exposed to rising economic growth risks, and robust dividends. But also sensitive to bond yields. Healthcare most attractive, with cheaper valuations, more growth, some cost protection. |
| Cyclicals | We expect cyclicals – consumer discretionary (autos, apparel, restaurants), industrials, energy, and materials, to lead performance. Are most sensitive to re-opening economies, resilient GDP growth, and higher bond yield outlook, with more sensitive businesses, depressed earnings, cheaper valuations, and been out-of-favor for many years. |
| Financials | Financials will benefit from resilient GDP growth, with higher loan demand and lower defaults. Similarly, they benefit from higher bond yields, charging more for loans than they pay for deposits. Sector has cheapest P/E valuation of any, and regulators giving flexibility to pay large 8-10% dividend and buyback yields. |
| Themes | We favour Value over Growth on GDP resilience, lower valuations, rising bond yields, under-ownership after decade under-performance. Dividends and buybacks recovering with cash flows. Power of dividends under-estimated, at up to 1/2 of total long term return. Secular growth of Renewables and Disruptive Tech themes. |
| Traffic lights* | Other Assets |
| Currencies | USD well-supported for now by rising Fed interest rate outlook and ‘safer-haven’ bid on virus fourth wave virus. This is likely more modest than prior USD rallies as rest of world growth recovers and virus fears ease. A strong USD traditionally hurts EM, commodities, US foreign earners, such as tech, but helps EU and Japan exporters. |
| Fixed Income | US 10-year bond yields to rise modestly as inflation above 2% average Fed target, ‘real’ inflation-adjusted yields negative, Fed to gradually tighten policy. Will be modest as inflation expectations already high, wide spread to other market bond yields, and structural headwinds of all-time high debt, poor demographics, and low productivity. |
| Commodities | In ‘sweet spot’ of robust GDP growth, ‘green’ industry demand, years of supply under-investment, recovering China, and Russia supply crisis. Industrial metals and battery materials well positioned. Oil helped by slow return of OPEC+ supply and Russia 10% world supply problems. Gold helped by risk-aversion but held back by rising bond yields. |
| Crypto | Institutionalization of bitcoin market barely begun, as asset class benefits from very strong risk-adjusted returns and low correlations with other assets. Altcoins have outperformed as see broader interest and use cases. Clear supply rules a benefit as inflation rises. Volatility remains very high, with the 15th -50% pullback of the last decade. |
| *Methodology: | Our guide to where we see better risk-adjusted outlook. Not investment advice. |
| Positive | Overall positive view, and expected to outperform the asset class on a 12-month view. |
| Neutral | Overall neutral view, with elements of strength and weakness on a 12-month view |
| Cautious | Overall cautious view, and expected to underperform the asset class on a 12-month view |
Source: eToro
Analyst Team
| Global Analyst Team | |
| CIO | Gil Shapira |
| Global Markets Strategist | Ben Laidler |
| United States | Callie Cox |
| United Kingdom | Adam Vettese Mark Crouch Simon Peters |
| France | Antoine Fraysse Soulier David Derhy |
| Holland | Jean-Paul van Oudheusden |
| Italy | Gabriel Dabach |
| Iberia/LatAm | Javier Molina |
| Poland | Pawel Majtkowski |
| Romania | Bogdan Maioreanu |
| Asia | Nemo Qin Marco Ma |
| Australia | Josh Gilbert |
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