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May 19, 2020

Advisory intelligence: Nasdaq tracks investor inflows and outflows during Covid-19

While the Covid-19 pandemic hit certain sectors hard in March and April, retail investors helped to stem losses and ESG funds showed remarkable resilience, according to an examination of investor inflows and outflows by Nasdaq.

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The analysis paints a picture of how investors reacted to the spread of Covid-19, which caused stock markets to fall around the world and central banks to step in with unprecedented support.

As Covid-19 fears spread through the market in early March, every sector took a tumble. But among the worst affected were energy and financials, explains Prab Sagoo, a Toronto-based senior analyst at Nasdaq IR Intelligence. ‘They are still down 30 percent from the near all-time highs we hit just before the crash,’ he says.

The weightings of these sectors had a substantial impact on how deeply the sell-off affected regional indices in North America, says Sagoo. ‘The energy space makes up approximately 3 percent of the S&P 500,’ he explains. ‘But it makes up in the region of 15 percent of the Canadian market, so the hit there was more sizable.’

Financial companies, by contrast, make up more than 10 percent of the S&P 500. ‘When you have 10 percent of your weight down 30 percent, it’s going to have a substantial impact on the rest of the index,’ adds Sagoo.

Retail support

The fall in stock markets could have been worse were it not for retail investors. Proprietary data from Nasdaq shows retail investors have been some of the biggest buyers of equities during the crisis. They have bought into tech and healthcare names, which are viewed as more resilient to the pandemic’s effects, as well as beaten down sectors like energy.

‘We had smart money moving out of energy, and we had retail participation stepping in,’ says Sagoo. ‘Some of the energy stocks are down 70 percent, 80 percent, 90 percent in the space of two or three weeks. The retail shareholder base was very keen to get in on that and try to make a quick profit, whereas institutional longer-term money was keen to sit on the sidelines and actually reduce exposure to that heavily hit sector.’

Retail investor assets are substantially smaller than other groups of investors, like pension funds or hedge funds, so they have a smaller overall impact on the market. But in times of dislocation, as witnessed over the last two months, those flows become more significant, says Sagoo. ‘In general, they are going to be out-muscled by the smarter money, if you will. But in this particular instance, they were surprisingly helpful in providing a consistent bid in the market.’

ESG shows worth

Another resilient part of the market during the Covid-19 crisis has been ESG funds. ESG-focused ETFs have seen some of the largest inflows this year of any ETFs in North America, according to data from Nasdaq.

‘In the initial phase of the crash, there were substantial outflows from ETFs,’ says Sagoo. ‘People were willing to liquidate everything – all to get cash. We saw the US Dollar Index hit multi-year highs during that time because everybody sold equities, debt, ETFs and gold, and moved into US dollars.’

While broader-equity ETFs didn’t fare well during the early part of the sell-off, ESG ETFs proved an exception. ‘They continue to see consistent inflows week over week,’ says Sagoo. ‘Year to date they’ve seen more inflows than any other ETF. What that tells us is that people see ESG investment as a positive way to invest during the downturn.’

Other asset flows

Prior to Covid-19, investors had been moving funds from the US to emerging markets, says Sagoo. That quickly changed when the full impact of the virus became apparent. ‘The US was seen to be richly or fully valued,’ he says. ‘But once we got into the crisis, asset managers revised their focus and returned to the US markets.’

Sagoo notes that, in the last couple of weeks, companies linked to China have seen a rebound as the country reopens. For example, tech is picking up inflows as its supply chains start to open up again.

Nasdaq has also closely followed short-interest throughout the spread of the pandemic and finds that short-interest in March hit some of its highest levels since 2017, as companies across the board saw bets against their share price.

‘Shorts were immediately covered as the markets bottomed out, and we saw some of the biggest covering since 2010,’ says Sagoo. ‘Since then, we’ve seen a gradual uptick in shorts again as the market starts to assess which names and sectors are going to see more prolonged concerns.’

IR advice

During downturns, companies are often swept up by the tide and have limited ability to influence the share price, says Sagoo. ‘But when your stock is down 10 percent on one particular date, it is important to understand why,’ he adds. ‘Understanding what’s happening in the market, how relevant it is to the stock, the strength of the signal: it’s all important.’

While a lot of the sell-off and rebound was broad-based, Sagoo says now is the time to pay closer attention to the specific performance of your company versus peers. ‘If you continue to underperform and see high shorting levels, and if peers are moving in the opposite direction, then it’s no longer a broad-market issue,’ he says. ‘It’s becoming more of a specific issue that IR professionals need to understand so they can fend off criticism and defend their story.’