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How Investors are Playing Defense

How Investors are Playing Defense

Thoughts on the Market vor 1 Jahr

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Our Chief Cross-Asset Strategist Serena Tang discusses the
market’s shifting perception of risk and what’s behind some
unusual patterns in fund flows among asset classes.

Read more insights from Morgan Stanley.

No investment recommendation is made with respect to any of the
ETFs or mutual funds referenced herein. Investors should not rely
on the information included in making investment decisions with
respect to those funds.

----- Transcript -----

Welcome to Thoughts on the Market. I’m Serena Tang, Morgan
Stanley’s Chief Cross-Asset Strategist. Today I want to look at
how investors are playing defense amid elevated macro
uncertainty.

It’s Tuesday, April 22, at 10am in New York.

So, the last three weeks have brought intense volatility to
global markets, and investors have had to reexamine their
relationship with risk. Typically, in times like these, mutual
fund and ETF flows from stocks into bonds serve as a clear gauge
of investor defensiveness. But this pattern hasn’t really been
informative this time around.

Instead, flows to gold – rather than bonds – have been the
clearest evidence of flight-to-quality most recently. Between
April 3rd and 11th almost US$5 billion went into gold ETFs
globally, one of the strongest seven-day net flow stretches ever.
There's been US$22 billion of net inflows to gold ETFs with
assets under management totaling about US$250 billion
year-to-date. Of the 10 days of the highest net inflows to gold
ETFs over the last 20 years, three occurred in the last month.

Cash also benefited from the dash to defensives, with over
US$100bn flowing into money market funds year-to-date. And we
expect that reallocating to cash will be a theme for the rest of
the year for many reasons. For one, our U.S. economists expect no
Fed cuts in 2025 and back-loaded cuts in 2026 following a
projected surge in core PCE inflation from tariffs. This means
that money market fund yields should stay higher for longer. And
with investors seeing the wild gyrations in safe government bonds
in recent weeks, money market funds’ low volatility offer a
strong risk/reward argument over holding Treasuries. For another,
let's say our economists' base case is incorrect, and we do get
steep cuts from the Fed sooner rather than later. That probably
means we're on the brink of a recession; and in that situation,
cash is king.

You know what's been particularly surprising in the middle of
this recent flight to quality? Outflows from high-grade US fixed
income. These outflows are notable because U.S. Treasuries,
Agency mortgages, and investment grade credit are usually seen as
low-beta and defensives. But U.S. high-grade bonds saw net
outflows of approximately US$1.4bn during the week of April 7th.
These are the largest outflows since the pandemic; and we think
that this trend can continue.

So we need to ask ourselves if this is the end of American
exceptionalism. And are we seeing a rotation from U.S. assets
into rest-of-the-world?

The answer may surprise you, but despite the outflows in U.S.
bonds, there hasn’t really been a persistent rotation out of U.S.
risk assets and into rest-of-world markets. At least not a lot of
evidence in the data yet. U.S. equity investors still have a
strong home bias, and we've seen continued net buying from
Japanese and euro area investors of foreign equities – at least
some of which are U.S. equities.

We think investors should stay defensive amid the current
uncertainty. But figuring out what's actually defensive has been
challenging. This recent turmoil in the global markets suggests
that the investors’ shifting idea of what's risky is a risk in
itself.

Thanks for listening. If you enjoy the show, please leave us a
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