More buyers than sellers
06 February 2020 | Paul Jakubowski
When someone on the trading floor asks why the market is up today, there is always one person who jokes that there are "more buyers than sellers!" In reality, we know that this can't be true, because in order for someone to buy, another has to sell1. But it does stimulate reflection and debate on market dynamics.
In fixed income markets, 2020 has got off to a hectic start with record new issuance globally. Countries and companies have rushed to market to take advantage of lower borrowing costs, tight spreads and upbeat investor sentiment. While the number and size of deals have been impressive, even more notable has been the demand from investors. The largest fixed-income issuance day ever recorded in history was 8 January 20202, with €33 billion issued across corporate bonds, covered bonds and sovereign, supranational and agency bonds. We also witnessed the second-highest weekly issuance ever during the first week of January as approximately €99 billion-worth of deals came to market.
Pan-European investment-grade issuance (€ billions)
Source: Bloomberg, Investment grade issuance (EUR) billion
As can be seen in the chart, the cumulative issuance of pan-European investment-grade corporate debt over the last six years has seen a significant increase. Furthermore, global asset class cash flows into mutual funds and ETFs for January have been robust. As of the penultimate week of January, we had seen $20.5 billion flow into equities, $56.1 billion into bonds and $34.8 billion into money market funds3.
These figures indicate that the market has a strong "technical bid". What does this mean? Markets can be driven by fundamentals, technicals or both. Fundamentals are statistics that define the financial value of a company, security or currency, such as earnings, free cash flow and gross domestic product (GDP). Technicals, on the other hand, are factors that influence prices in a financial market that are related to the way the market works, rather than to the nature of the investments being traded. Simply put, technicals involve supply and demand and investor sentiment. And this is exactly what we are seeing in the markets at the moment. The fundamental data released in January has not been materially that different from previous months, and yet the markets have reacted in a positive fashion, except for the recent concerns over the coronavirus. There is probably a lot of "FOMO" – fear of missing out – taking place on the heels of a stellar 2019 that saw global equity and fixed income markets return 27.3% and 6.8%, respectively, over the year4.
So why are technicals important? Markets do not always operate rationally, sometimes for extended periods of time. Investors often have trouble separating their emotions from the data and can deviate from solid investment principles. This can lead to strong or weak technicals and, subsequently, higher or lower asset prices. This is especially true during financial crises and recessions. Investors see negative returns and negative momentum and panic, usually selling at the exact time they should be taking a fundamental, long-term view and buying (or at least holding). Technicals do not last forever and are extremely hard to predict, particularly at the big turning points. Investor sentiment indices help monitor these technical trends.
The Global Risk-Love Indicator is nearing a record high
Source: Bank of America (BofA) Global Research, Bloomberg
In the equity markets, the Bank of America Global Risk-Love Indicator shows that equity optimism is close to an all-time high. This is consistent with our recent six-month outlook in which we stated that "investor sentiment at the end of 2019 was cautiously optimistic as geopolitical risks appeared to moderate"5. We also observed "future risks to be tilted to the downside". This is further supported by the Risk-Love Indicator, as sentiment indices tend to provide great contrarian signals. As seen above, the last time this sentiment index was at these levels, the MSCI Emerging Market Index sold off dramatically in the following months.
So what does this mean for investors? It's relatively easy to try and explain market moves by fundamentals. Given the volume of data available – be it earnings, GDP or unemployment rates – not to mention market-moving events, it's no wonder that the fundamentals can consume so much of your attention.
But it is important to bear in mind that, at times, these fundamentals may not be the biggest drivers of asset returns. It could simply be investor sentiment – in short, more buyers (at higher valuations than the current ones) than sellers. Investors need to be informed – but also grounded. It helps to remember that sentiment can change quickly, potentially in a day, as we have seen recently with the coronavirus. Investors should beware FOMO too, as it can lead to poor decisions and bad investment outcomes.
Next time you see the market move, consider whether it's being driven by fundamentals, technicals or both. And remember, the answer's likely to be a bit more nuanced than "more buyers than sellers".
1 One exception is when there is new issuance, whether in the form of an initial public offering (IPO) or a bond deal.
2 Source: Barclays Research
3 Source: Bank of America (BofA) Global Research and EPFR Global for the week ending 22 January 2020.
4 Source: Bloomberg. FTSE Developed Index and Bloomberg Barclays Global Aggregate Bond Index annual returns as at 31 December 2019.
5 Vanguard economic and market outlook for 2020: The new age of uncertainty
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