Photographer: Luke MacGregor/Bloomberg

What Investment Flows Can Teach You About Brexit

These Bloomberg functions provide a window into how money is moving across borders in M&A deals, portfolio investments, and ETFs.

Flows can provide powerful insights into economic and market trends. Both long-term foreign direct investment and ­shorter-term portfolio flows can be viewed as the business and investing communities’ judgment on policymakers’ economic and regulatory decisions. Buying a stake in a company or shares of an ­exchange-traded fund, for instance, could imply a vote of confidence.

For insights into long- and short-term capital flows, you can use a couple of Bloomberg data analytics, which cover both cross-border M&A activity and portfolio flows.

To track foreign direct investment flows, go to {FLMA <GO>}.

The U.K.’S June 2016 Brexit vote provides a perfect case study in how an unexpected political outcome can have a significant impact on perceptions by the global investor community. As Brexit nears its expected implementation of March 2019, one of the biggest fears is that multinational companies will no longer see the U.K. as a gateway to Europe and may prefer to invest on the ­Continent ­instead.

Start by running {FLMA <GO>} for the Cross Border Mergers and Acquisitions function. Select the United Kingdom in the top left amber box and change the Position to Inward. That shows in a ­selected period, such as last month, the total foreign direct investment—­that is, M&A transactions in which buyers are acquiring stakes in the U.K., as reported by either the company or the adviser.

The chart at the bottom displays a history of these flows. It may be surprising to see the spike in inward investment in October 2016, after the vote to exit the European Union. However, that October data point reflects deals that happened to be completed that month. If you use the radio button in the upper left part of the screen to select Announced Deals and uncheck Include ­Terminated Deals, you’ll see that the deals completed that October were generally announced before the vote.

Change the periodicity in the top right to quarterly, and you’ll see that the announced deal volume hasn’t fallen off a cliff since the referendum. M&A deals involving U.K. companies continue to be announced. That’s a bullish indicator for the U.K. economy and the British pound. The chart in the top-right corner displays the geographical breakdown of the origin of the investment: In the third quarter of 2017, 65 percent of total investment in the U.K. came from North America. To drill down further into the specific deals themselves, click on the magnifying glass icon next to North America, which will take you into the {MA <GO>} function. To see all the deals in the third quarter ranked by announced total value, sort the Deal List section accordingly; click into any deal to see its details.

To track trends in cross-border portfolio investment flows, run {FOFP <GO>}.

Short-term capital flows  are a focus of both investors and regulators. Investors focus on trends in fixed-income, equity, or alternative portfolio flows to understand sentiment by the larger investor community, while regulators are increasingly looking to monitor those flows to get real-time data regarding trends that could affect local markets.

To analyze trends in cross-border capital flows and ­changes in investor holdings, check out Bloomberg’s Flow of Fund Portfolio at {FOFP <GO>}. The function displays Bloomberg’s in-house holdings database, which is updated on a quarterly basis, along with monthly estimates between official quarterly releases.

Select United Kingdom in the top left. Use the radio button to select Flow. To see investment flows into the U.K., change the ­Financial Position to Liabilities (money coming into the U.K. to buy assets, of course, creates a liability from the perspective of the country). Next, to see investment in U.K. bonds from abroad, select Debt as the Indicator. FOFP shows that the biggest inflow from the second quarter to the end of September came from China: $2.2 billion.

Now, click on the red China bar to chart the history of this flow. Interestingly, China started withdrawing its investment in U.K. bonds in the third quarter of 2015, shortly before the Brexit referendum was announced. China then continued to pull money out of U.K. bonds until the second quarter of 2017, when flows turned positive.

Click on the View in PORT button in FOFP to display the portfolio of foreign holdings of U.K. stocks in PORT.

Perhaps even more powerful in terms of current positioning, you can now see the breakdown of the stock of equity investment in the U.K. in the Portfolio & Risk Analytics (PORT) function. Close the History window. Use the radio button to select Stock rather than Flow. Change the indicator to Equity. The table at the bottom right of the FOFP screen shows the total U.K. market value: $3.6 trillion as of late October. Of that, Bloomberg had holdings data on 62 percent of the market. What’s more, 45 percent of the total market was owned by foreigners: $1.6 trillion. U.S. investors were the largest holders of U.K. stocks, followed by Canadians and Norwegians.

To display the entire portfolio of the world’s equity investment in the U.K., click on the View in PORT button on the red toolbar. Click on the Holdings tab, and you can see that the Global Industry Classification Standard sector that has attracted the biggest share of the world’s investment into the U.K. is financials. To drill down into the individual names that foreign investors hold, click on the plus sign to the left of financials and then sort by weighting. Among the companies with the most foreign ownership by value are HSBC Holdings, Prudential, and AON. This list of foreign-­held U.K. stocks could be a place to start examining a company’s exposure to a hard Brexit scenario in which financial passport rights to do business in Europe are denied.

To track ETF flows, run {FFLO <GO>}.

The flood of money pouring into passive investments has led to increased interest in real-time analysis of these flows. To view ETF flows on a country or regional basis, run {FFLO <GO>}.

To track ETF flows into and out of the U.K., use the drop-down menu to the right of View to select Countries. Select Netflow in the Show field. Net flow into U.K. ETFs has been $1.5 billion this year through October, with inflows of $7.4 billion and outflows of $5.9 billion.

For a map of flows, click on the Map tab. For more detail on U.K. ETFs, click on United Kingdom. You can use the tabs to analyze flows, performance, and liquidity.
 Minde and Jonathan are FX and economics market specialists at Bloomberg in New York.

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