Central bankers get their wish as all asset class inflows plunge in 2022

David Thornton

Livewire Markets

The tightening cycle by central banks seems to be having the intended cooling effect on markets, with investor confidence across all asset classes falling sharply in 2022. 

According to the latest Fund Flow Index from Calastone:

  • active equity fund inflows fell 74%;
  • equity fund inflows fell by 60% to $5.74 billion
  • and fixed income fund inflows shrank 95% from $10.54 billion in 2021 to $562m in 2022.

Investors weren't missing out on much. For context, the S&P/ASX 200 returned -1.08% in 2022, while the S&P/ASX Australian Fixed Interest Index fared even worse at -11.12%.

The only relative 'win' was had by ESG equity funds, which only saw a fall in inflows by less than a fifth compared to three quarters for non-ESG equities.

While outflows eclipsed inflows, aggregate activity remained much the same with aggregate turnover in 2022 much the same as 2021. So while investors were pessimistic, they remained engaged in the market. 

These investment flows come as little surprise.

“The Treasurer, Jim Chalmers, expects Australia’s economy to slow this year as the cost of living squeeze tightens," says Teresa Walker, Managing Director of Australia and New Zealand at Calastone

"Other economies are already in recession, while the China Covid-19 resurgence is negative for regional growth and Australian business interests. Asset values have repriced in the last year owing to the higher rate environment but it’s not yet clear how hard the corporate profits shoe will drop and this will be key to sentiment on equity funds in the months ahead.”

Equity flows: a tale of two cities

The third quarter witnessed a bear market rally, through July and early August, which accounted for two thirds of all equity inflows in 2022. 

Source: Calastone

This exuberance turned on a dime, however. The fourth quarter saw net equity inflows of  $296 million, the weakest read since Q1 2020 and down 90% year-on-year compared to Q4 2021.

The only positive reading in equity flows came from global funds, with inflows of $256 million. And among that, three quarters of it went to funds with an ESG mandate.  

“The outflows from domestic equities are particularly notable," observes Walker. 

"The ASX had a much worse December than its peers in the US, UK and Europe and this has prompted investors to turn net sellers of domestically focused equity funds for the first time since the pandemic began."

Fixed income carnage

In the simplest terms, when rates rise (or are expected to rise) the value of bonds falls. 

So when inflation took hold and central bankers started hiking rates and shrinking their balance sheets, the value of bonds fell. 

This was felt by fixed income funds in performance but also in terms of flow. In the first half of 2022, Aussies yanked $1.45 billion out of fixed income funds . Year on year, fund inflows shrank a 95% to $562 million. 

Source: Calastone

The rubber band of markets did its thing, though. By October, sentiment had begun to improve and investors added $824m to their bond portfolios in the fourth quarter.

“Yields on fixed income funds are looking significantly more attractive in the wake of 2022’s bond market declines," says Walker. 

"Investors have also recently begun to hope that the interest interest-rate tightening cycle may be nearing its peak both in Australia and overseas. These two factors have tempted them back into fixed income funds in the last few weeks of 2022."

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David Thornton
Content Editor
Livewire Markets

David is a content editor at Livewire Markets. He currently hosts The Rules of Investing, a half hour podcast where he sits down with leading experts across equities, fixed income and macro.

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