skip to main content
Close Icon We use cookies to improve your website experience.  To learn about our use of cookies and how you can manage your cookie settings, please see our Cookie Policy.  By continuing to use the website, you consent to our use of cookies.
Global Search Configuration

Quantifying Global market ‘flight to safety’ rotations in times of uncertainty - trade wars & political unrest

New developments on trade war are shifting the risk outlook significantly in the minds of investors. Most of the asset classes has been affected from the ‘flight-to-safety’ mode in global markets since mid-May.

EPFR has tracked outflows from some risky assets to less risky assets since the start of the year, for example, there’s noticeable regular equity-to-bond rotation activity almost weekly since the start of 2019. However, after recent trade negotiations proved inconclusive, and President Trump raised tariffs on Chinese imports (May 10th), we have started to see more broad-based ‘flight-to-safety’ activity across different assets classes.

In these extraordinary times, it is important to identify what is extreme and what is not. Using EPFR data, we can analyse fund flows and investigate whether the current rotations we see - risky to less risky assets – will be significant historically. We can determine the significance by looking at rotations between 4 different pairs of asset classes as well as flows into money market funds. NB. All the applied data are generated from institutional flows, except the FX rotations.

Figure 1 below, shows the difference between flow as a percentage to equities vs bonds in the last 5 years. The graph clearly shows an equity-to-bond rotation in continuum for a long time, with the exception of a brief pause from Q4 -2017 to Q4-2018.

Quant Corner

Figure 1 - The difference between flow as a percentage to equities vs bonds


The risk appetite towards US High Yield and EM Hard Currency bonds on the other hand, has shifted for the first time since the start of 2019. From the beginning of May 2019, investors’ cautiousness about global growth has affected the outlook on credit products. (Figure 2-dashed line:15.05.2019)

Quant Corner    Quant Corner

Figure 2 - The difference between flow as a percentage to US High Yield and EM Hard Currency vs US Treasuries

The additional significance in the difference is this happened at a time when US 10-year Treasuries dipped below 2.10% and expectations of a FED rate hike turned to a rate cut.

Also High Yielding EM currencies has started to see flow rotations towards low yielding currencies for the first time since October,2018 (Figure-3-dashed line:15.05.2019) .

Quant Corner    Quant Corner
Figure 3 - The difference between flow as a percentage to High Yield Currencies (BRL, ZAR, RUB, MXN, TRY) vs low yield (EUR, USD, JPY) – Right figure shows 4-week cumulative flows

On the other hand, flows to short-duration money market funds have spiked, with 4-week cumulative flows-to-money-market funds, one of the strongest after May 10th.

Quant Corner  

Figure 4 - 4 - week cumulative flows to Money Market Funds

These rotations can happen individually due to idiosyncratic risks related to geographic, or asset classes, but the orchestrated ‘flight-to-safety’ across all of them is most significant in recent weeks. Statistically out of 267 weeks analysed, it is only 36 weeks historically that we have seen ‘flight-to-safety’ rotation across all 5 pairs. The longest rotation appeared back in October 2014 and continued through to February, 2015. The current rotation we have been experiencing is 3-weeks old.

Quant Corner  

Figure 5 – Count of Flight to Safety across 5 different asset pairs

Identifying ‘flight-to-safety’ quantitatively is a complicated task. And researchers generally have difficulty even in differentiating ‘days-weeks-months’ as days of normal rotations, or flight-to-safety. Applying the methodology described above with the granularity in EPFR data, will help you identify flight-to-safety days and calibrate your own models.

For more insight subscribe here

Any questions? Speak to a specialist

Would you like to request sample data or analysis from Informa Financial Intelligence? 

See how our tailored solutions can help you gain a competitive advantage: