Thoughts on the Market: Episode Summary – "How Investors are Playing Defense"

Release Date: April 22, 2025
Host: Serena Tang, Morgan Stanley's Chief Cross Asset Strategist

Introduction: Navigating Elevated Macro Uncertainty

In the latest episode of Thoughts on the Market, Serena Tang delves into the strategies investors are employing to safeguard their portfolios amidst heightened macroeconomic uncertainties. Released on April 22, 2025, the discussion sheds light on recent market volatilities and the shifting dynamics of investor behavior.

Market Volatility and Reassessing Risk

Over the past three weeks, global markets have experienced significant turbulence, compelling investors to reevaluate their risk profiles.

“[00:35] Serena Tang: 'The last three weeks have brought intense volatility to global markets and investors have had to re-examine their relationship with risk.'”

Traditional Defensive Shifts: Stocks to Bonds?

Traditionally, during periods of market instability, investors move funds from equities into bonds to mitigate risk. However, this episode highlights a deviation from this pattern.

“[00:46] Serena Tang: '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.'”

Flight to Quality: Surge in Gold Investments

Instead of bonds, gold has emerged as the preferred safe-haven asset, signaling a distinct shift in investor behavior.

• Gold ETF Inflows: Between April 3rd and 11th, nearly $5 billion flowed into gold ETFs, marking one of the strongest seven-day net flow periods ever observed.

• Year-to-Date Performance: To date, gold ETFs have seen $22 billion in net inflows, accumulating assets under management to approximately $250 billion.

• Historical Context: Of the top ten days with the highest net inflows into gold ETFs over the past two decades, three occurred in the last month alone.

“[01:20] Serena Tang: 'Instead, flows to gold rather than bonds have been the clearest evidence of flight to quality.'”

Movement Towards Cash and Money Market Funds

Parallel to the gold surge, there has been a significant shift towards cash holdings, particularly in money market funds.

• Money Market Inflows: Over $100 billion has been allocated to money market funds year-to-date.

• Rationale Behind Cash Preference:

  • Fed Policy Expectations: US economists anticipate no Federal Reserve rate cuts in 2025 and potential backloaded cuts in 2026 due to a projected uptick in core PCE inflation stemming from tariffs.
  • Yield Advantages: This outlook suggests that money market fund yields will remain attractive for an extended period.
  • Volatility Concerns: Recent fluctuations in government bonds make the low volatility of money market funds an appealing alternative, offering a superior risk-reward profile compared to holding Treasuries.

“[02:10] Serena Tang: 'We expect that reallocating to cash will be a theme for the rest of the year for many reasons.'”

Implications of Potential Fed Rate Cuts

Serena Tang posits that if the current economic forecasts are incorrect and the Fed initiates steep rate cuts sooner than anticipated, it could signal the onset of a recession, reinforcing the adage that "cash is king."

“[02:45] Serena Tang: 'That probably means we're on the brink of a recession and in that situation, cash is king.'”

Unexpected Outflows from US High-Grade Bonds

A surprising trend contradicts the typical flight to quality narrative: significant outflows from high-grade US fixed income securities.

• Magnitude of Outflows: During the week of April 7th, high-grade US bonds experienced net outflows of approximately $1.4 billion, the largest since the pandemic onset.

• Historical Significance: These securities, including US Treasuries, agency mortgages, and investment-grade credit, are traditionally viewed as low-beta and defensive assets.

“[03:05] Serena Tang: '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.'”

Global Investment Trends: Evaluating American Exceptionalism

The episode explores whether the outflows from US bonds indicate a broader rotation from US assets to international markets.

• Findings: Contrary to what might be expected, there hasn't been a sustained rotation out of US risk assets into global markets. The data does not show significant shifts in investor allocations internationally.

• Home Bias Persistence: US equity investors continue to exhibit a strong preference for domestic assets.

• Foreign Investment in US Equities: Conversely, there is ongoing net buying of US equities by Japanese and euro area investors.

“[03:35] Serena Tang: '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.'”

Re-defining Defensive Investments: A Double-Edged Sword

Amidst the current uncertainty, maintaining a defensive posture remains advisable. However, the episode underscores the complexities in identifying genuinely defensive assets in the current climate.

“[03:55] Serena Tang: 'We think investors should stay defensive amid the current uncertainty, but figuring out what's actually defensive has been challenging.'”

The episode concludes by cautioning that the very act of redefining what constitutes a safe investment amid market turmoil introduces new risks, suggesting that investors must navigate these changes carefully.

“[04:00] Serena Tang: 'This recent turmoil in the global market suggests that investors shifting idea of what's risky is a risk in itself.'”

Conclusion: Strategic Defensiveness in Unstable Times

In "How Investors are Playing Defense," Serena Tang provides a comprehensive analysis of current defensive investment trends, highlighting a notable pivot towards gold and cash over traditional bond markets. The episode emphasizes the importance of adaptability in investment strategies amidst evolving economic indicators and market behaviors. As investors grapple with defining safety in a volatile environment, the insights shared offer valuable guidance for navigating the complexities of the modern financial landscape.

Note: The episode excludes advertisements, intros, outros, and non-content sections to focus solely on the substantive discussions.