M UpdateUS Credit Strategy Brief | North AmericaFund Flows – Starting on a Strong FootingMorgan Stanley & Co. LLCVishwas PatkarStrategist Vishwas.Patkar@morganstanley.com +1 212 761-8041 Karen ChenStrategist Karen.Chen@morganstanley.com +1 212 761-1199 Joyce JiangStrategist Joyce.Jiang@morganstanley.com +1 212 761-0165 Ian RobinsonStrategist Ian.Robinson@morganstanley.com +1 212 761-3117 Inflows into credit have been strong to start the year, with HY steady and IG accelerating, while Loans have lagged. IG flows have skewed toward ETFs, which have so far seen their best Jan inflows. From here, flows should be most supportive for 1-5Y IG as we approach the start of policy easing.One of our key themes for 2024 is for credit technicals to improve, as the macro and monetary policy backdrop becomes more supportive. After a nearly two years (4Q21 through 3Q23) in which fixed income returns were underwhelming and active funds saw outflows in aggregate, the tide is turning, in our view. The environment broadly remains supportive for credit risk. Growth should slow per our economists, but not collapse, which is typically good for credit. We expect the start of rate cuts across major DM central banks (Fed, the ECB, and the BoE). We think the rates curve will bull steepen, which helps push marginal investment dollars into credit, both from domestic and overseas investors. And finally, 2023 saw a significant build-up of AUM in ultra short-dated assets (such as money market funds), which we expect will rotate out the curve as competition from "cash" eases. Exhibit 1:Credit flows making a rebound(30)(20)(10)01020Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan202220232024($bn)Monthly Fund Flows - Weekly ReportersIGHYLoansSource: Refinitiv, Morgan Stanley Research; Data through Jan 24, 2024For context, IG funds saw record outflows in 2022 (based on Lipper data), followed by an underwhelming small inflow number in 2023 that was driven entirely by ETFs. HY and Loans flows similarly saw outflows in 2022 and 2023 but experienced strong inflows in late 2023. While it is still early in the year, the first few weeks of 2024 are so far supportive of technicals improving. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.January 26, 2024 08:20 PM GMTM Update2Exhibit 2:Total returns sharply improved in 4Q for both IG...(15.0%)(10.0%)(5.0%)0.0%5.0%10.0%15.0%Jan-21Mar-21May-21Jul-21Sep-21Nov-21Jan-22Mar-22May-22Jul-22Sep-22No...
