BofA Strategists See Surging Equity Flows While Bonds Get Dumped

(Bloomberg) -- A wild start to the year for global equity markets hasn't deterred investors, with data showing ever-increasing inflows in stock funds while bonds and cash are being dumped.

Equity funds attracted $21.8 billion in the week to Feb. 2, bringing the year-to-date total to $106 billion, according to Bank of America Corp. strategists tracking EPFR Global data. At the same time, bond funds had their largest weekly outflow since March 2021, and cash holdings also fell.

“Sinister price action in corporate bonds coincided with big outflows. Not the case in stocks year-to-date,” strategists led by Michael Hartnett wrote in a note on Friday. In the past, high-yield outflows combined with large stock inflows have signaled “big tops” -- the peak before sustained declines -- in equities, he said.

While EPFR's fund flows -- which look at mutual fund and ETF asset data -- only show a small part of what is going on in the markets, they do indicate that there is still appetite for risk. Despite a brutal selloff that saw the Nasdaq 100 Index plunge 11% this year, 20 out of 23 trading days saw inflows into equities, BofA said.

READ: European Stocks Get Largest Inflows Since May 2017, BofA Says

As for other asset classes, $11.6 billion exited bond funds in the week to Feb. 2, with high yield and investment grade debt seeing their ninth-largest weekly outflows since 2003. Cash holdings, meanwhile, were reduced by $24.4 billion in the week in EPFR's data.

BofA's strategists remain bearish on equities, predicting a “rates shock” in the first half of this year followed by a “growth shock” in the second, triggering negative returns for both equities and credit.

READ: BofA Strategists See ‘Bad Combo' for Stocks and Credit in 2022

Central banks in Europe turned more hawkish this week to fight soaring inflation, with both the Bank of England and the European Central Bank starting to align to the Federal Reserve's tone on rate hikes.

“Rates shock goes global, tech wreck threatens systemic damage, recession scare goes mainstream,” Hartnett wrote, summarizing what he said was a historic week for global markets.