$6.3 billion has flown into this asset class so far in 2024

In the year when the Magnificent Seven has pushed equity markets to new heights, you would assume that much of the managed fund inflows headed towards equities. The truth is vastly different and while it may come as a surprise, perhaps it shouldn’t.

According to Calastone’s flow data – which represents funds domiciled in Australia and transacted across Calastone’s network – fixed-income funds have been the clear winners of flows in the first half of 2024, gaining A$6.26 billion.

By contrast, equity funds finished the first half of 2024 down A$2.19 billion.

It paints an illuminating picture of what Australian investors are looking for in the current environment, and according to Marsha Lee, Managing Director Australia and New Zealand at Calastone, has been consistently seen in our global peers.

A quick overview of the macro environment

If we take a quick walk down memory lane for the first half of the year, we’ve seen the following:

• A slowdown in global economic growth, particularly in Australia.
• Muted reporting seasons in February and August, with many earnings downgrades.
• Ongoing geopolitical tensions and a range of country elections, such as in the UK and India. While the US Federal Elections are later this year, Trump 2.0 has dominated media attention.
• US equities have hit record highs – as have Australian equities – leading many to fear that we’ve hit the peak and a correction is coming.
• Ongoing challenges to the Chinese economy which plays on commodities markets, a major concern for Australia.

This by no means covers everything either.

Simultaneously, fixed income is looking the most attractive it has been in years and the signs are clear that we’ve hit the peak of quantitative tightening. While Australia is not expected to see any cuts this year, market commentators tip cuts for the US and Europe as early as September.

What this all means for investors

There are two clear themes to consider from all of this.

1. Locking in fixed interest rates at current levels before easing starts could be a good idea for investors.
2. Concerns over where we are in the market cycle may encourage an investor to crystallise gains in some assets while encouraging a ‘flight to safety’ in others

The data plays this out.

For the industry as a whole, there were outflows of A$1.92 billion in the first quarter, but this was offset by gains of A$3.21 billion in the second quarter, largely fuelled by flows to fixed income funds according to Calastone’s data.

The data shows inflows to fixed income in the first half of 2024 were almost three times that seen in the first half of 2023, while equity funds endured their worst quarter in Calastone’s records in the first quarter, shedding A$2.23 billion. There was some tepid recovery to follow in April on market dips, only for further outflows in May and June.

Lee describes the flight to fixed income as “reflecting a widespread preference for stable, income-generating assets amid market volatility and economic uncertainties, likely magnified by higher local costs of living.”

You could argue this flight to safety has similarly been behind the surging gold prices in the year to date.

That said though, Lee cautions against viewing this as fixed income becoming dominant in portfolios, but rather a sign of active trading and muted activity towards ‘riskier assets’ until any harder signals for central bank rate cuts.

“Despite record outflows in Q1, trading in equity funds was very active throughout 1H 2024, with gross turnover notably higher than for fixed income funds. This shows that investors are actively allocating capital and that equity funds remain dominant in portfolios,” Lee says.

In short, fixed income has become increasingly attractive to investors, but isn’t likely to dislodge the great Australian love of equities.

Did you adjust your portfolio allocations in the first half of 2024? Let us know in the comments how you are managing the current environment.