THE ALTA REPORT.
A quarterly compilation derived from our unique vantage point at the intersection of markets. Touching approximately 20% of the world’s investable assets gives us insight into key trends, helping you navigate the future arc of markets and macro developments.
Diversification Calls
Sticky U.S. inflation has delayed Federal Reserve rate cuts, and some clients are now slowing the pace of long-dated Treasury purchases accordingly. At the same time, demand for U.S. government bonds remains strong, and higher-for-longer U.S. rates have rekindled overseas interest.
BNY Mellon economists, meanwhile, believe that the European Central Bank will begin cutting rates in June ahead of the Fed, and that the GDP gap between the U.S. and the Eurozone could close by 2025. We’ve already seen new inflows into Europe, but many of our clients are still exhibiting a home bias.
Elsewhere, we’ve observed clients buying yen again, most likely expecting it to strengthen against the U.S. dollar while becoming less pessimistic on the yuan. They are also investing in frontier market bonds for yield enhancement.
With equity and fixed income markets experiencing renewed uncertainty, alternatives are becoming a mainstay for portfolio managers. Private market fund managers are targeting more wealth and retail clients as allocations to hedge funds fall.
Worlds Collide
European GDP growth is expected to rise and meet that of a weakening U.S.
Big Picture
A Crowded Trade
With the “Magnificent Seven” trade in the S&P 500 overcrowded, there has been a clear interest in diversification.
Ben Slavin, our global head of ETF servicing, says retail-oriented accounts have been buying actively managed ETFs focusing on U.S. large-cap stocks. We saw purchases of these ETFs increase 260% in the first quarter compared to the last three months of 2023. We also witnessed signs of allocation shifts into small-cap strategies and non-U.S. equities, given their lower relative valuations.
On the passive side, we’re seeing investors turn to sector-based funds and equal-weighted indexes that offer an alternative approach to the traditional market cap-weighted index.
Can't Concentrate
Sales* of large-cap equities in Q1 were driven by active ETFs.
Long Yen Again
Our real-money clients have started buying yen again, having been short in the lead up to, and even after, the Bank of Japan’s (BoJ) March move to end its negative interest rate policy (NIRP).
With yen touching 34-year lows in April and investors expecting authorities to intervene, clients are now anticipating that the currency will ultimately strengthen against the U.S. dollar. But our global head of macro strategy Bob Savage believes the BoJ may be surprised by how much it will need to raise rates to support the yen.
Yen Roller Coaster
Our clients have sharply bought back the yen, anticipating intervention.
Stocks, Bonds Split
Our data show that the positive correlation between stock and bond investment flows has reversed, with real-money clients now selling bonds when they buy stocks and vice versa. In fact, our measure of that correlation is now at its most negative point in the last decade. If this persists, bonds could regain their traditional role as a hedge against stocks.
Additionally, the price correlation between stocks and bonds may be about to turn, according to our strategists. The U.S. core personal consumption expenditures (PCE) price index fell below 3% recently, a threshold at which the stock-bond correlation historically tends to shift from positive to negative. The strategists believe this may nudge more investors out of cash.
Correlation Shifting
Stock and bond prices are moving in different directions.
Bonds could regain their traditional role as a hedge against stocks.
Downsizing Duration?
Real-money clients are still buying longer-duration U.S. Treasurys, albeit at a slightly slower pace than in the fourth quarter, after stronger-than-expected economic data pushed up yields and likely postponed Fed rate cuts.
Institutional and retail clients executing and clearing trades with Pershing’s fixed income desk have also demonstrated less interest in extending their duration positions since December.
These duration strategies may be reduced even further if yields continue to rise on the back of heavier Treasury supply in the second half, or if the U.S. government’s fiscal profile deteriorates, according to our U.S. macro strategist John Velis.
Duration Positioning Stalls
Real-money investors are still buying longer-duration U.S. Treasurys, but at a slower pace.
Duration Dwindles
Clients are paring back longer-duration Treasurys.
MMFs Flush with Corporate Cash
We’re seeing cash continue to move into money market funds (MMFs), with corporates driving much of the inflow, seemingly investing in these vehicles for yield and risk management. Most flows from financial institutions and governments have either stabilized or, in the case of hedge funds, fallen. Our experts also anticipate hedge funds may shift back into MMFs when rate cuts are imminent, because lower interest rates should take longer to impact MMF yields than Treasury bills and overnight repos.
Meanwhile, our data show retail broker-dealers and registered investment advisors (RIAs) are beginning to withdraw cash from MMFs and short-duration ETFs, a trend that our strategists think is unlikely to accelerate until after the Fed cuts rates.
Cashing In
Corporate cash allocations are rising in money market funds.
Hedge funds may shift back into MMFs when rate cuts are imminent.
AI to Drive S&P to 6,600?
Some of our economists believe artificial intelligence’s (AI’s) impact on equity prices is still underappreciated. They estimate that only 60% of the “Magnificent Seven” stocks’ returns stem from the technology, and that AI could drive the S&P 500 to 6,600 by early 2026.
The team’s most optimistic scenario sees AI boosting productivity, causing inflation to fall more rapidly than expected and prompting faster-than-expected rate cuts. But in their most pessimistic scenario inflation reaccelerates, resulting in a more aggressive policy response and less enthusiasm for AI.
AI Is…Undervalued?
The technology could send the S&P 500 around 30% higher by 2026.
International
Home Bias
Clients still have a general bias toward their home markets, despite growing concerns about crowded trades in equities and the potential to access new opportunities internationally. Interest in equities abroad picked up in November, as central banks seemed close to the end of rate hikes, but since February the overall trend in global cross-border equity flows has been down.
At their lowest point in April 2022, cross-border outflows around the world fell by an average of over $1.6 billion per day. They are currently still quite negative, with the most recent monthly data indicating outflows of $750 million daily.
While some investors are maintaining small exposures to emerging and developing markets, Savage expects the home bias to remain in place, in part because of continued political unrest around the world.
Homebodies
Cross-border flows into global equity markets, including the U.S., have trended down.
Foreign UST Buying Resumes
Appetite for U.S. Treasurys has been strong this year, largely because of U.S. domestic buying. That said, our flows show overseas buyers have returned in recent weeks amid escalating Middle East tensions.
Our strategists warn that U.S. accounts may find themselves holding onto more Treasury debt than they want in the second half if April’s overseas buying is not sustained.
U-Turn
Cross-border buyers are returning to U.S. Treasurys market.
China Negativity Subsiding
We’re seeing flows into the yuan stabilizing and giving an ancillary boost to other Asian currencies, according to macro strategist Geoff Yu. One example is the Taiwan dollar, which has also been buoyed by both the local market and the strength of semiconductor stocks lately. In addition, flows into the Malaysian ringgit have turned positive recently, helped by high levels of Chinese investment and tourism.
Asian Flows Recover
China’s yuan is bouncing back, prompting investor interest in Asia.
Frontier Markets Draw Interest
Clients are favoring frontier markets that are implementing tough fiscal reforms. Inflows into Egyptian sovereign bonds increased in March, after the central bank let its currency float to unlock an expanded loan from the International Monetary Fund, and the United Arab Emirates made an investment in the country.
Over the past few months, investor flows into Nigerian sovereign bonds have been larger than flows into any of the other 11 frontier markets we track. Argentina has also attracted inflows as it moves to ease its 2024 debt burden and makes public sector reforms.
Frontiers Flourish
Investors are seeking exposure to Egyptian and Nigerian sovereign bonds following changes to fiscal and monetary policy.
Clients are favoring frontier markets that are implementing tough fiscal reforms.
Our vantage point comes from:
Touching
20%
of the world’s investable assets*
Safekeeping
$48.8T
in assets (custody and/or administration) as the world’s largest custodian**
Settling
$13.6T
in U.S. government securities daily***
Servicing
$5.3T
average tri-party collateral management balances***
Processing
$2.5T
of U.S. dollar payments value***
Managing
$2.0T
assets under management1**
Financing
$4.9T
in lendable securities***
Investing
$309B
for Wealth Management clients2**