Tuesday, July 28, 2015

US Asset Flows + The Thing That is Chinese Stock Market

Flows into/out of/ within the US. Treasury released the TIC data last week (for May). This is how it looks (international flows in to the US)
International flows in to treasuries picked up this year since Q3 last year, mostly driven by private flows (as opposed to official, i.e. other central banks and sovereign wealth funds). The total official year-on-year growth in flows in negative territory for the first time (apart from a flirting with it early 2014). However total flows still positive, money continues to be pumped into treasuries by foreigners. Negative flows since March this year mostly driven by the financial centers, i.e. the UK, Belgium, so is China (Mainland) and Hong Kong put together. However, Caribbean (presumably a good proxy for hedge fund flows) has been quite positive.
On other assets, the corporate bond turned a corner and now in positive territory, while equities outflows continue.
On domestic front, the total equities flows to mutual funds flattened out mid last year, but allocation to world equities still strong. And bonds funds flows have seen a comeback since start of the year, after a minor hiccup Sep last year (which is interesting, as that coincides with a strong sell-off US equities). Also money markets flows picked up, perhaps pointing towards a more defensive stance among fund managers and other institutional allocators. Flow to bonds outside US (including ETFs) has diminished quite a lot since Jan, after a strong pick up last year around March (not shown here).
Key takeaways: 1) treasuries are yet to be become hot potatoes among investors in view of rising rates 2) too many folks missed out the strong sustained equity rally in the US and in no mood to get back 3) overall institutions seems to be holding most cash in recent times. This hardly makes a case for a sharp correction in US equities - not by a rate hike at least. A force from outside is a different matter altogether.

And on the later point, here is a comparison between NASDAQ Composite and Shanghai Composite from a long term investing point of view. This shows average growth of the cash indices vs. volume weighted price (VWAP) since beginning July last year (when the Chinese equity rally took off, click to enlarge).

The point is, Chinese equities are still up on YTD basis, even after the recent carnage (15% YTD and 83% if you invested start of last year). One way to estimate the damage is comparing the VWAP price with an average price. The scenario of VWAP being lower than average price is a really bad one, as that signifies volumes in selloff was larger and on a net basis offsets the gain during the rally. In plain English: more people lost money than gained. The chart above captures this. The VWAP and average lines are close to each other for NASDAQ composite but the VWAP is outperforming the average for Shanghai Composite so far. So as of now, the market is still up in China, and no hidden catastrophic pain than it appears. Of course two things can offset this conclusion: Who came in last? If it is the regular Joes (with a higher marginal consumption to income ratio) then it is bad for consumption part of the GDP. Secondly we have the recency effect, this kind of sell off is unnerving. Where do you invest in China if you are the little guy? real estates are not looking great, bank deposits is value eroding, and equities, they simply has taken you for a ride. Increase in central bank liquidity is not that effective in a risk-off scenario.

Upcoming bid data release: US Q2 GDP advance estimate and Employee Cost Index, both on this Thursday.

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