The $100-trillion withdrawal from global stock markets

By J.L.M. Campuzano, in Madrid | After four gloomy weeks, we finally get to see a welcome development: cash is now paramount. In a macroeconomics scenario like the current one, the answer to the question “what will companies spend their high cash flow on?” seems clear: share buybacks. But this is a conclusion that is still to become obvious. Meanwhile, we should be concerned with the end investor’s money. It is at this point that I find the positive news. Last week, US stock funds received $2.1tr of net inflows. Of course, there also were $1.8tr going into fixed income funds –with returns at a historical minimum, as in the case of treasuries. Yet, even the latter doesn’t seem negative to me, given the panic that has this August gripped investors and dragged them to liquidate risky positions. Money calls for money, but it is too early to talk about this.

Let’s look back for a moment: in July, we saw net capital outflows from US stock funds for an amount exceeding $22tr. And barely half of it turned into entries in fixed income funds.

My estimates indicate withdrawals from global stock markets have been equivalent to more than $100bn since May, which accounts for losses in the global average index of 19% over this period. More than $42tr withdrew only during August ($45tr in sales in February 2009). More than $30tr did so in the developed markets and $12tr in the emerging ones. A decreasing tendency can be noted in both cases, although last week we still witnessed over $2tr sales from funds on emerging markets. So far this year the total net outflows have reached $68tr. But as I said before, August has been the first month since September 2008 in which we saw net capital outflows from funds on the stock markets, and fixed income and money funds, too. In the case of global fixed income funds, net sales of $16tr (although there have been more net capital inflows for more than $99tr during the year). As for money funds, net sales in August amounted to $18tr. As they say, “keep calm and carry on:” inflows for the year exceed $270tr in this type of asset.

It would seem an easy task to point out the reasons for all this panic: from fears of a US debt crisis in the absence of a stable agreement about the debt ceiling to fears of another (global) recession, to renewing fears concerning the international banking sector and, sure enough, the still pending EU debt crisis. Have these fears been overcome? To say so with a VIX level at 35% would be as if we were deceiving ourselves. Central banks have room to manoeuvre, although it is clear that the current situation can’t be fixed as easily as it was last summer. Governments must act. Economic data will confirm whether a scenario of low growth and not recession is in place. The markets are already beginning to discard the worse scenario. Although I prefer to look at it as though the markets do not discard anything, really. Their behaviour is simply the result of irrational panic. Hopefully the “rational” fear shall return. This would be positive, indeed.

J.L.M. Campuzano is a former Citigroup financial analyst.