Fund flows indicate bear market has further to run

Mike Taylor

Managing Editor/Publisher, Financial Newswire

13 April 2023

The bear market has longer to run according to a new analysis from Calastone which has noted that Australian investors pulled more capital out of managed funds in the first quarter of this year than at any time since the beginning of the pandemic.

Release its latest Fund Flow Index, Calastone said that outflows reached $516 million between January and March – representing the first quarter to see capital leave equity funds in three years.

Commenting on the analysis, Calatone’s Australia and New Zealand managing director, Teresa Walker said it was too early to call a definitive end to the bear market.

“The ASX has been trading within a range over the last three months, rising and sliding in lockstep with global markets. It is too early to call a definitive end to the global bear market – rallies in the first quarter mainly reflected a cycle of flurries of optimism that financial conditions were easing, followed by fears they were not,” Walker said.

“The bigger picture is that, globally, corporate earnings are under pressure and inflation is proving uncomfortably sticky both here in Australia and elsewhere. The Reserve Bank held interest rates steady this month, going into ‘wait and see’ mode and long bond yields are falling indicating fears of a slowdown ahead.”

The Calastone analysis also pointed out that domestic funds had been preferred over international offerings stating that there had been a clear preference for domestic equities in the first quarter with Australian investors adding $319 million to equity funds listed on the ASX, while they withdrew capital from every overseas category.

The analysis noted that real estate funds had suffered their first quarterly outflow since Q2, last year which represented only the second quarter on Calastone’s record that investors had withdrawn capital from the sector.

“Commercial real estate is triply vulnerable when interest rates are high or rising. First, higher rates impact demand – lower occupancy affects rents paid to investors. And secondly, the sector uses more leverage than most so higher interest costs bite into profit margins,” Walker said.

“Finally, property values are also very sensitive to the higher cost of capital. Australia’s strong growth over recent years has supported the domestic real estate sector, but it is not immune to these realities. The start of the global rate-rise cycle over a year ago quickly caused a sharp drop in net inflows to real estate funds, driven mainly by a buyers’ strike rather than a big increase in sell orders.”