2Q18 Global Cost Review: Trade War Preparation
Noteworthy findings from ITG’s 2Q2018 Global Cost Review, based on flow and transaction cost data from more than 180 institutional investors.
Trade war talk heats up
Beginning in January 2018, global investors have been on alert, positioning themselves to best navigate the effects of US-initiated trade wars.
What began as limited in scope (tariffs on solar panels and washing machines from China) had broadened in Q2 across multiple industries and to other US trading partners such as Europe and Canada. We look to ITG’s Global Peer universe of trading activity to explain trends related to institutional flow and cost of trading.
Clear trends are taking shape as institutional investors build strategic portfolios. Within ITG’s data set, China was the clear winner in net capital flow from both absolute and net perspectives. In fact, ITG’s Global Peer universe shows the total value of buy orders in Q2 was 33% higher than combined sell order value, whereas slight negative outflows were witnessed in the US, Germany and Canada (trailing at -4.5% net). Europe showed a 1% net gain.
- As expected, institutional investors did exhibit a transition from large-cap to mid-cap stocks (thought to be less susceptible to trade war scenarios), with a tallied US$28.5 billion leaving large caps and US$6 billion entering mid caps globally. Within our universe, this behavior was consistent in global equities, the US, Canada and Germany. This was not the case for China, however; 80% of total country net flow poured into large caps.
- As for sector allocation shifts, in the US we observed the greatest net inflow into the resources sector (+6.47% net) and outflows in financials and telecom (-9% net). Funds also flowed into Europe’s resources sector, with buy value greater than sell value by 14%. On the other side of the resources sector shift, Canada shed $1 billion (-4% net) in recorded flow while Germany’s resources sector realized a whopping -23% net outflow. Bucking the trend again, China saw positive dollar flow into all sectors, leading with industrials, consumer non-cyclicals and utilities, each showing net positive inflow greater than 50%.
Overall cost of trading
Subdued volatility and controlled spreads across regions meant no major surprises, and global trading costs remained virtually unchanged at 35.63bps.
- US aggregate IS trading costs were 31.55bps—the highest levels since 1Q2016. Last quarter’s mid-cap increase of 36% has subsided, but was offset by the highest large-cap costs we’ve seen in nine quarters, 28.9bps. In contrast, IS costs in Canada decreased by 25%, driven by lower costs of trading large caps (down 34% to 22bps) and small caps (down 58% to 29bps).
- Asia Pacific IS costs rose 11% to 47bps, fueled by a surge in small-cap costs coming out of Australia and New Zealand. China saw costs of 61bps, where a decrease in mid-cap costs were made up by large increases in large and small caps (the latter surged from 4bps to 78bps).
- Europe IS costs remained virtually unchanged, with the aggregate being 30.18bps, where a large decrease in micro-cap costs was countered by modest large- and mid-cap increases. Germany’s aggregate IS cost rose to 30bps, led by a 42% increase in large-cap costs.