By Helen Reid
LONDON (Reuters) - Appetite for equities came back with a vengeance this week, driving record inflows as concerns around trade dissipated and billions more were ploughed into tech stocks, Bank of America (NYSE:BAC) Merrill-Lynch strategists said on Friday.
Alongside the resurgence of a "wall of money" going into stocks, BAML however noted that equities are not yielding as much as these flows would suggest.
Signs of peaking credit markets and the rising inter-bank borrowing rate could be "cracks" in the wall, strategists added.
ONE STEP BACK, TWO STEPS FORWARD
A record $43.3 billion was driven into equities this week as investors shrugged off trade risks that had initially sent stocks reeling, figures from flows tracker EPFR cited by BAML indicated.
U.S. large-cap funds, which lost $10.1 billion last week, drew in more than double that amount this week, enjoying their fourth highest ever inflows at $22 billion.
Equity inflows are outpacing bond inflows for the first time since 2013, with annualised flows of $717 billion. Bond funds managed relatively minute inflows of $2.4 billion this week.
"Flows indicate clients positioned for higher EPS [earnings per share], higher short rates, higher bond yields, lower U.S. dollar," wrote the strategists. (Mar 16 BAML silicon mountain: http://reut.rs/2HD4o28)
Massive flows into tech stocks have created a towering pile of cash in the sector dubbed "Silicon mountain" by BAML strategists.
A record $2.6 billion went into tech stocks this week, cementing the sector's leading position. Investors have ploughed a total of $9.8 billion into tech funds so far this year - making the annualised flow figure a massive $46.5 billion.
Financials drew in $1.6 billion, and are the second most popular sector after tech, having enjoyed $7.3 billion of inflows year-to-date.
European stocks saw modest outflows of $1.3 billion, meanwhile. Emerging market equities continued to draw in cash ($2.7 billion) and Japanese equity funds enjoyed their 15th straight week of inflows as the popularity of the asset class proved resilient.
But large inflows are out of step with more muted returns from equities.
"Chart-topping inflows not coinciding with headline returns," the strategists said, pointing to the NYSE composite index (NYA), which is down year-to-date. All major European stock indices are still in the red since the start of 2018, while the S&P 500 is only slightly up.
TEPID RETURNS, CREDIT OUTFLOWS KEEP LID ON SENTIMENT
Despite torrential inflows into stocks, BAML's Bull & Bear index of investor sentiment fell from 6.8 to 6.5 on the more muted equity returns, and as outflows from emerging market debt and high-yield corporate bonds increased.
What BAML calls "cracks" in the wall of money include signs the credit market is peaking, and a rising inter-bank borrowing rate.
High-yield corporate bond fund flows reached a "clear negative inflection point", strategists said, noting the ninth straight week of outflows from high-yield bond funds - their longest losing streak since 2007.
Investors pulled $0.7 billion from emerging market debt funds.
Strategists said inflows and returns for investment grade, high yield and EM debt funds are peaking, which could be a harbinger of lower equity returns.
Treasuries funds drew in $0.3 billion in their eighth straight week of inflows. "Treasuries and bunds hinting at 'growth scare' makes stocks vulnerable," the strategists wrote.
The increasing inter-bank borrowing rate (LIBOR) was likely to lead to tighter financial conditions, they added. Short-term borrowing costs have surged in the past weeks to levels last seen in the 2008 global financial crisis.
A rise in the U.S. dollar could also hobble the rally in tech and emerging market stocks.
Passive investment vehicles reasserted their dominance this week as the vast majority of investors used exchange-traded funds (ETFs) to plough money back into stocks.
A record $43.9 billion was driven into equity ETFs while mutual funds suffered $0.6 billion of outflows. Actively managed funds had managed to claw back some inflows in the past few weeks.