US inflows at 18-month high; influx in India-dedicated funds most consistent since 2003-2006 period: Elara

The trend is similar to that of the Indian market. Foreign investor inflows have been strong in broader markets leading them to hit multiple record highs. The benchmark indices have also been on a record-high run in the current month, which has not yet happened for the US market.

Mid and small-cap stocks in the United States have been trading within a narrow range since April 2022. However, with the recent resurgence in US mid/small-cap flows, the brokerage believes, that there’s potential for a breakout in this index.

If the index indeed breaks out, there’s anticipation of a substantial 20 percent rally, propelling it back to its previous highs from November 2021, said Elara. This scenario suggests the possibility of renewed strength and momentum in the mid/small-cap segment of the US stock market.

While the S&P 500 is just 2 percent away from its all-time high, the Russell 2000 index remains 20 percent lower. The report noted that the S&P Equal Weight index is now outperforming the weighted index for the first time since January 2023, indicating a broadening market breadth in the US after nearly 15-18 months.

Elara highlighted that there has been a substantial increase in flows into US mid-cap funds, reaching $4.7 billion, the highest level since December 2021. Small-cap funds have also experienced significant flows, reaching $4.5 billion, marking the second-largest inflow since June 2022. These trends suggest a positive shift in the US market dynamics.

China and the emerging markets

The brokerage report also noted that apart from the US Federal Reserve’s dovish comments, China’s central bank has taken measures to support its economy by injecting $112 billion into the financial system. This proactive move has sparked a resurgence in foreign investment into China, with foreign institutional investors contributing $711 million, marking the second-largest inflow since April 2023. Notably, foreign investment in China had seen a pause since August 2022. The recent action by China’s central bank raises the question of whether this trend will reverse, it informed.

On a broader scale, Elara observed that the emerging market (EM) flows have reached a four-month high at $4 billion, driven by a robust recovery in China and sustained inflows into India. However, it’s worth noting that EM flows are predominantly concentrated in large-cap funds, it said.

India, in particular, has experienced a surge in dedicated flows, reaching a three-month high of $713 million, primarily led by large-cap investments. This trend represents the most significant and consistent influx of India-dedicated funds since the period between 2003 and 2006. The momentum began in October 2022 and has been steadily expanding, stated the brokerage.

Sectors

Elara pointed out that there has been a notable surge in flows into the tech sector, reaching $9.5 billion, primarily driven by investments in US tech stocks. Concurrently, global financial inflows have reached a six-month high, totaling $3.8 billion. Interestingly, despite the recent rally in US tech stocks, the financial sector is outperforming in this particular market movement. Conversely, flows into the energy and materials sectors have been marginally negative over the past three weeks, it informed.

The focal points of global flow activities are centered around the information technology (IT) and financial sectors. Particularly, there is a robust and sustained recovery in high-yield and corporate bond flows, extending for the sixth consecutive week, added the brokerage.

Moreover, the Net Asset Values (NAVs) of these funds have also broken out, reaching 15-month highs, reflecting the strength and resilience in these segments of the market.

Bond markets

Post the Federal Reserve’s shift in stance, there are promising developments in the global bond markets. The Net Asset Value (NAV) of Investment Grade bonds had reached its lowest point in October 2022, and since then, it had been trading within a range for over a year. However, recent trends are displaying early indications of a breakout, signaling the beginning of a recovery in bond markets after a period spanning more than two years.

Moreover, the recovery is more pronounced in high-yield and corporate bond funds, where NAV lines have already surpassed 15-month highs. This suggests a robust rebound in these segments, indicating that bond markets are gradually starting to heal after an extended period of challenges and volatility, noted the brokerage.

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Published: 18 Dec 2023, 12:07 PM IST