Bank of America analysts warn that the recent Iran conflict is translating into heightened market turbulence and firmer energy prices, a dynamic the bank expects will sap flows into equities, high-yield loans and alternative investments during March and April.
According to the bank's analysis, the conflict-driven market environment coincides with seasonal pressures. Tax season outflows and the absence of the 401(k) inflows typically seen in January and February create what BofA describes as a negative near-term setup for traditional asset managers.
Looking at monthly flow patterns, BofA reports that in the prior month active equity strategies posted improved net flows while passive equity flows were essentially flat. Money market vehicles moved into positive net inflows, and bond fund flows softened slightly.
For early March the initial data show money market and fixed income flows remain positive on a month-to-date basis, while equity flows have shifted negative. Bank of America characterizes this pattern as typical for geopolitical shocks that trigger a spike in the VIX, widening credit spreads and corrections in equity markets.
Geographic performance has been uneven. BofA notes that equity markets of countries that are net exporters of oil and natural gas and which are less exposed to a potential closure of the Strait of Hormuz have outperformed those of net importers. The bank cites Canada, Brazil, Norway and the United States as examples, and it calls out sector strength in energy, defense and metals and mining funds.
On a manager-by-manager basis, Bank of America observed positive or improving net flow outcomes for a broad set of firms. The list includes AllianceBernstein, Amundi, BlackRock, Cohen & Steers, DWS, Federated Hermes, Invesco, Janus Henderson, Jupiter, Lazard, Morgan Stanley, PIMCO, Prudential, Charles Schwab, Schroders, Vanguard and Westwood. BofA attributes these favorable flows largely to these firms' exposure to fixed income, passive equity, ETF and money market fund businesses.
Within its coverage, Bank of America assigns a Buy rating to BlackRock, noting the firm has historically outperformed during other periods of market volatility. The bank also assigns a Buy rating to Affiliated Managers Group.
Summary
Bank of America links the Iran conflict and rising energy prices to a near-term pullback in investor flows across equities, high-yield loans and alternatives, while money market and fixed income channels have shown resilience into March. The bank highlights a group of asset managers positioned to benefit from demand for fixed income, passive and cash products, and it prefers BlackRock and Affiliated Managers Group within its coverage.
Key points
- Geopolitical tensions are increasing volatility and energy prices, pressuring flows into risk assets such as equities and high-yield loans.
- Money market and fixed income funds have attracted positive flows in early March, reflecting a defensive shift in investor positioning.
- Managers with sizable fixed income, passive equity, ETF and money market capabilities are experiencing positive or improving flows; BofA favors BlackRock and Affiliated Managers Group.
Risks and uncertainties
- Continued escalation of the geopolitical conflict could further widen credit spreads and deepen equity corrections, weighing on asset manager flows.
- Seasonal tax-related outflows and the loss of early-year 401(k) inflows could prolong a challenging near-term revenue environment for traditional asset managers.
- Market responses remain contingent on energy price movements and the extent to which regional supply disruptions impact global markets.