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Welcome to Thoughts on the Market. I'm Serena Tang, Morgan Stanley's Chief Cross Asset Strategist. Today I want to look at how investors are playing defense amid elevated macro uncertainty. It's Tuesday, April 22nd at 10am in New York. So the last three weeks have brought intense volatility to global markets and investors have had to re examine their relationship with risk. Typically, in times like these, mutual fund and ETF flows from stocks into bonds serve as a clear gauge of investor defensiveness. But this pattern hasn't really been informative this time around. Instead, flows to gold rather than bonds have been the clearest evidence of flight to quality. Most recently between April 3rd and 11th, almost US$5 billion went into gold ETFs, globally one of the strongest seven day net FL flow stretches ever. There has been $22 billion of net inflows to gold ETFs with assets under management totaling about $250 billion year to date. Of the 10 days of the highest net inflows to gold ETFs over the last 20 years, three occurred in the last month. Cash also benefited from the dash to defensives with over $100 billion flowing into money market funds year to date. And we expect that reallocating to cash will be a theme for the rest of the year for many reasons. For one, our US economists expect no Fed cuts in 2025 and backloaded cuts in 2026 following a projected surge in core PCE inflation from tariffs. This means that money market fund yields should stay higher for longer. And with investors seeing the wild gyrations in safe government bonds in recent weeks, money market funds low volatility offer a strong risk reward argument over holding Treasuries. For another, let's say our economist base case is incorrect and we do get steep cuts from the Fed sooner rather than later. That probably means we're on the brink of a recession and in that situation, cash is king. You know what's been particularly surprising in the middle of this recent flight to quality outflows from high grade US Fixed income. These outflows are notable because US Treasuries, agency mortgages and investment grade credit are usually seen as low beta and defensives. But US high grade bonds saw net outflows of approximately 1.4 billion during the week of April 7th. These are the largest outflows since the pandemic and we think that this trend can continue. So we need to ask ourselves if this is the end of American exceptionalism and are we seeing a rotation from US Assets into rest of the world. The answer may surprise you, but despite the outflows in US bonds, there hasn't really been a persistent rotation out of US risk assets and into a rest of world markets. At least not a lot of evidence in the data. Yet U.S. equity investors still have a strong home bias and we've seen continued net buying from Japanese and euro area investors of foreign equities, at least some of which are US Equities. We think investors should stay defensive amid the current uncertainty, but figuring out what's actually defensive has been challenging. This recent turmoil in the global market suggests that investors shifting idea of what's risky is a risk in itself. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.
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