In a recent analysis of the equity ETF landscape, we see a significant shift in capital flows amidst rising CPI and PPI numbers, along with a rebound in oil prices. While the U.S. job market continues to slow and the minutes from the September FOMC meeting leaned dovish, the U.S. stock market managed to close higher. The S&P 500 Index crossed the 5800 mark, although the bond market broadly declined.
Over the past week, equity ETFs experienced a net inflow of $584.6 billion, with the U.S., China, and Asia attracting $507.7 billion, $32.236 billion, and $29.916 billion, respectively. Europe and Latin America also saw modest inflows, while Japan and Eastern Europe faced net outflows of $3.352 billion and $0.023 billion. Sector-wise, the top three industries with net inflows were technology, financials, and industrials, while the energy sector saw the highest net outflow, followed by communications and staples.
Looking ahead, Franklin Templeton Investments anticipates continued market volatility driven by geopolitical tensions in the Middle East, the upcoming U.S. elections on November 5, and corporate earnings reports. Fortunately, the U.S. economy remains stable, and the likelihood of a soft landing is still high. The current investment strategy focuses on a core allocation to balanced and multi-sector bond funds, complemented by non-investment-grade U.S. bonds and global emerging market local currency bonds, to seize opportunities arising from divergent global monetary policies. Apart from AI tech stocks, which are expected to remain long-term favorites, there is optimism for sectors such as climate change/utilities, value stocks (including financials, energy, and materials), biotechnology, and U.S. small-cap stocks, allowing for a diversified approach to market cycles.
Edward Brook, the manager of Franklin Templeton’s Stable Monthly Income Fund, highlighted that the current U.S. economic environment appears healthy, with improved market breadth and promising corporate profit growth prospects. The recent market volatility and valuation corrections present entry points for investors. His strategy in recent months has involved gradually increasing positions in undervalued, high-quality stocks.
Jim Stoeffel, manager of the Janus Henderson U.S. Small Cap Opportunities Fund, noted that small businesses often exhibit greater operational leverage compared to larger corporations, making economic growth particularly critical for small caps. He emphasized that lower interest rates are a key driver of economic acceleration and will be crucial for future small-cap merger activity. Additionally, factors such as U.S. government infrastructure investment, supply chain trends, and increased demand for electrification in the energy grid are creating substantial growth opportunities in the small-cap space, especially in natural gas and AI data center-related sectors.
