BofA Warns Of "Tech Mania" Risk: Sees Highest Tech Inflows Since Dot Com Bubble

As one would expect, in a week that saw the biggest one-day drop in US equities since last September, retail investors bailed on US stocks resulting in what BofA dubbed "risk-off flows" as $1.6 billion was pulled from global equities - with active managers once again getting the short end of the stick, with $4.3 billion in outflows from mutual funds, largest in 7 weeks while another $2.7 billion flowed  into ETFs - offset by $9.7 billion inflows to bonds and $0.2 billion to gold.

That said, the bifurcation in equity flows has continued as European equity funds continued to see inflows for an 8th consecutive week (a $1.1 billion inflow) although the pace has slowed from a record level a week ago. The monthly data reveal that the asset class recorded the highest inflow since Dec'15 and the second positive in a row.

The flows reflect big asset allocation preference for EU disclosed previously in the Fund Managers Survey, shown below; rotation into EU from US ($8.9bn outflow) continues

As for the US, it could get worse: BofA's Mike Hartnett notes that DC disruption presents a new risk as the Washington political malaise causes capital flight from US. YTD foreigners have bought $71.4bn US stocks, corporate bonds & government bonds. The question now is whether they will sell.

Looking across other asset classes, bonds saw solid inflows in the past week, with IG & HY inflows biggest in 6 weeks; YTD inflows to bonds of $154bn outpacing inflows to stocks of $125bn

Meanwhile, until Thursday's Brazilian crash, money continued to flow into emerging markets, with EM seeing both debt ($1.6bn) & equity ($3.9bn) inflows this week; In fact, piggybacking on Gundlach's emerging market enthusiasm, EMs are the YTD flow winner and YTD return winner (stocks +18%, bonds +7%) as the weaker dollar, lower yields overwhelm China credit fears. 

Some other fund flows observations:

  • Flow leadership YTD: 1. bank loans (annualizing inflows of 49% of AUM) 2. EM debt (26%) 3. tech (25%) 4. financials (20% - Chart 2)

  • Tech mania: as shown recently when we broke down the latest 13F filing, tech inflows are annualizing at the strongest pace in 15 years, or since the dot com bubble; the risk is that the longer it takes economy & yields to pick-up, the greater risk of tech mania note Nasdaq Internet index (QNET) annualizing 75% gain YTD

Meanwhile, the active vs passive decoupling noted above continued: passive equity inflows this week ($2.7bn) vs active outflows ($4.3bn); YTD passive = $178bn inflows, active = $52bn outflows; past 10 years, $2.2tn into passive and $2.2tn outflows from active

And a detailed breakdown of asset class flows :

  • Bonds: inflows 20 of the last 21 weeks ($9.7bn)

  • Equities: $1.6bn outflows ($2.7bn into ETFs, $4.3bn outflows from mutual funds, largest in 7 weeks)

  • Precious metals: inflows 5 of past 6 weeks ($0.2bn)

Equity Flows

  • US: $8.9bn outflows, 3rd straight week

  • EM: 9 straight weeks of inflows, largest in 39 weeks ($3.9bn)

  • Japan: outflows 4 of past 6 weeks ($1.5bn)

  • Europe: 8 straight weeks of inflows ($1.1bn)

By style:

  • US value fund outflows 8 of past 9 weeks ($2.0bn), outflows from US small caps ($1.5bn)

By sector:

  • inflows to tech ($1.0bn, 11 straight weeks),

  • healthcare ($0.1bn), infrastructure ($40mm),

  • energy ($0.1bn); outflows from financials ($1.0bn),

  • consumer ($0.1bn), utilities ($0.1bn),

  • materials ($0.1bn),

  • real estate ($1.5bn, largest in 4 years)

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