Speaker 0: Joining us now to talk about the recent uptick in volatility of market rotation and flows into ETF S is Mark Carver, managing director and global head of Equity Factor products at MS C I. Well, Mark, great to have you back with us.

Speaker 1: Great to see you, Janet, thanks for having me.

Speaker 0: So first, Mark market volatility has increased, especially in September. Is this a reflection of the macro backdrop?

Speaker 1: It's probably more a reflection of the macro backdrop and what some people say, which is that it's the, you know, typical September and you know, September historically has been

Speaker 1: a volatile month, but let's think about a conversation. You and I have had a couple of times this year on this show and then others in that for a long time, equity investors in particular have almost been ignoring what the fed has been saying, what central banks have been saying more generally, which is that they were gonna take steps to get inflation under control and bring it back to their policy targets. And many investors felt

Speaker 1: there was more likely to be a not just a pause but maybe even a pivot and that there could be, you know, rate declines on the back end of this.

Speaker 1: What we're seeing now is realization that rates are here to, to uh to stay higher for longer. And the FED is going to be continuously diligent. And the reality of that is we're seeing volatility in the markets. Equities have been softening. Global equities are down 1% in the last month. Us equity down even more than that. And we're seeing rotation even within equities and we're seeing the version of us uh and non us equities. All of this is a reflection I think of investors now starting to

Speaker 1: uh grapple with the realities of the macro backdrop and what it means for companies' ability to deliver earnings for what you're willing to pay for those earnings. And um I think that's the driver behind the market volatility.

Speaker 0: Let's talk a little bit more about that rotation that you mentioned. Mark. This has been a recurring theme and we continue to observe market leadership shifting, what's driving this?

Speaker 1: I think it's driving uh being driven by that sentiment and it, and it's the the real

Speaker 1: um reaction that investors have to what central banks will do last year was a big year for value investors, not a great year for equities. We know that, but it was a big year for value investors. This year was a uh start of the year was dominated by maybe the hype cycle around A I and particularly the magnificent seven that carried the day that meant that growth stocks of growth as a style

Speaker 1: was dominating the headlines and was the best performer. But in the third quarter, we're seeing a rotation back to value. Part of that could be the real reality that with rates staying higher inflation, staying higher, that near uh you know, lower duration equity assets

Speaker 1: will be more prudent. Now, the reason this is so interesting is typically these cycles play out over very long horizons, but we're seeing within a year movement between various investment themes, taking leadership. And that's surprising. It's also surprising the difference we see in the performance of different investment styles across markets

Speaker 1: value over the last 12 months um has been relatively weak in the US despite what we saw in 2022 if you look at the last 12 months, but it's been relatively strong in many other global markets. That diversification means that investors have an opportunity to differentiate the way they're taking exposures in the US market versus global equities.

Speaker 1: And that level of diversification, that level of opportunity is something that we're starting to see investors uh ask us about or really hear them, ask us about, they're starting to reallocate capital based on the differences in the macro backdrop and the performance opportunity they see in this uh various markets.

Speaker 0: Yeah, 2022 is a a very challenging year, as you uh you mentioned earlier, but you've observed that those have been relatively strong for equities including into value and quality investments. Is this consistent with what clients are asking you?

Speaker 1: It's consistent with what clients are asking us and it's consistent with what clients are telling us. And let me let me distinguish the, the two

Speaker 1: uh this year when we look at flows, it's effectively been particularly in the US market. But we see this even beyond the USA flight to quality, that shouldn't surprise anybody because investors um in this type of environment where earnings are slowing, they're going to want companies that can deliver uh strong earnings and relatively uh have relatively healthy balance sheets. So they don't have a lot of leverage given the cost of capital going up. So it shouldn't surprise anybody that we're seeing that flight to quality.

Speaker 1: We're getting more and more questions about the resilience of quality, the resilience of value in periods of changing rate, inflationary environments. But interestingly, we did a survey earlier this year among institutional investors and asking the question about what factors and what investment styles they favored giving the macro backdrop. And what we heard overwhelmingly, in fact, 50% of the clients in the survey came back and said

Speaker 1: we prefer quality in this type of economic environment. More than a quarter said they preferred value in this type of economic environment. And so those were the, you know, the the the two most standout in recent times, we've seen flows back into value if we look at the year in total, it's been a flight to quality.

Speaker 0: Well, Mark, thank you so much for joining us.

Speaker 1: It's my pleasure. Good to see you

Speaker 0: and thank you to everyone watching. Once again, that was Mark Carver with MS C I, I'm Jenna Dagenhart with Asset TV.