Nearly two months into 2022 and investors have already pulled some $160 billion from money-market funds and another $17.5 billion from bond mutual funds and exchange-traded funds (ETFs). The outflow is on track to becoming the biggest in at least seven years.
While a portion of the outflows has been funneled into stock funds, the upcoming interest rate hikes have made value stocks a seemingly more attractive option for investors.
Investors Dump Bonds as Inflation and Geopolitical Tensions Rises
Money market funds, which are open-ended mutual funds that invest in short-term debt securities such as US Treasury bills and commercial paper, are usually deemed as a safe place to keep cash. However, with inflation reaching the highest level in 40 years, the purchasing power of these funds has weakened.
Furthermore, rising geopolitical uncertainty is scaring away investors. The outcome of the stand-off between Russia and Ukraine, which could have major implications for the global economy, is worrying to investors. As reported, this has pushed investors to unload risk assets like crypto and instead turn to safe-haven assets like gold.
Meanwhile, the sentiment around the stock market is also not superb but still seems to be the most viable option. “There’s not a whole lot of options for people,” said Jonathan Waite, a senior investment analyst at Frost Investment Advisors, when talking about current investment opportunities in the market.
In fact, investor sentiment has continued to exacerbate recently. According to a recent survey by the American Association of Individual Investors, a nonprofit investor education organization has found that only 19% of individuals expect US stocks to rise over the next six months.
As long as investors remain skeptical of the markets, largely due to geopolitical turmoil and the outlook for monetary policy, markets would continue performing poorly. This describes why Goldman Sachs has recently lowered its outlook for the S&P 500, cutting its year-end target for the benchmark index to 4,900 points from 5,100.
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Investors in 2022 Are Favoring Value Stocks
Despite all the uncertainty, many investors have proceeded to invest in the stock market. According to data from FactSet, investors have poured around $18 billion into the Vanguard S&P 500 ETF, which represents 500 of the largest US companies, since the year started, and another $11 billion into a similar fund run by BlackRock’s iShares unit.
However, in general, investors are very selective, favoring cheap value stocks over pricier shares of fast-growing companies. Value stocks are shares of undervalued companies. In other words, value stocks appear to be trading at a lower price relative to their fundamentals, such as dividends, earnings, or sales.
Christopher Wood, chief global head of equity strategy at brokerage Jefferies, also agreed that investors are moving toward value stocks amid upcoming interest rate hikes. In his weekly note titled ‘Greed & Fear,’ Wood said:
“The change in equity market leadership looks ever more pronounced in terms of the shift from growth to value stocks as investors have discounted ever more rate hikes following last week’s 7.5% year on year US CPI report for January.”
Data by Refinitiv Lipper further supports this hypothesis. According to the firm, large-cap value funds have attracted $5.2 billion since the start of the year, already more than half of the amount they raised for the entirety of 2021. Likewise, funds focused on dividend strategies have pulled in $13.2 billion, while large-cap growth funds have shed $18 billion.
David Groman, a global equity strategist at Citi, also agrees with Wood, predicting that value stocks are the preferred investment choice as of now. “His latest analysis showed value stocks’ forward-looking price-to-earnings ratios trailing growth by as much as 40%.” The Wall Street Journal reported.
Meanwhile, the crypto market has persisted to remain choppy. Investors are skeptical of pouring money into crypto-assets, which are considered risk assets. Bitcoin, the largest cryptocurrency by market cap, is largely flat YTD, failing to bring any impressive gains. However, it remains to be seen if investors would eventually pour some of the funds flowing out of bonds into cryptocurrencies.
Do you think crypto will be able to capture a portion of the funds flowing out of bonds? Let us know in the comments below.
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