Recent stock market updates from Citi and Barclays analysts, based on financial data provided by EPFR, will surprise you, but will also provide some important clues. So let’s see this ABC of market recovery.
Be careful and be on the alert because institutional investors have not bought on the March market downtrend. Looking for answers
The EPFR financial intelligence platform specializes in delving into global fund flows that capture both large institutions and retail investors. EPFR data, but above all the insights that derive from it, are highly sought after by market analysts and managers, who try to decipher the global mood and the latest movements. Do you want the first big surprise? Really almost a shock?
The latest update of EPFR data showed that practically no one had bought after March 23 on global stock markets. Do you understand the scope of what? This raises two obvious questions: a) who has bought in the past two months? b) what do institutional investors intend to do with all this liquidity, now that the stock markets have made such a remarkable run-up? So who bought if no institutional made it and retail savers can’t move the markets? Both Citi and Barclays point the finger at the same source: i short sellers who closed their positions.
The underlying trend towards passive investment remains very intact.
Over the past 12 months, investors have moved $ 541 billion from active equity funds and invested $ 327 billion in passive alternatives (ETFs). The equally surprising, and important, observation is that in March investors moved their money globally from bonds at the same time as the sale of shares. Citi analysts go so far as to point out that the money that comes out of the bonds is the most important story of this year.
Achieving a total net withdrawal of $ 445 billion, outflows from bond funds in March are labeled “unprecedented”. Fortunately, central banks managed to stop the route, with inflows returning in April.
In particular, high yield bond funds recovered all March outflows the following month. Data show that money has continued to flow into US corporate bonds (“credit”) since the Fed declared itself the buyer in that particular market segment. The enthusiasm of investors has not been replicated replicated in Europe or in emerging markets (both clearly still seen as high risk).
Hence, fewer investors put their money into stocks.
But less traditional market players, such as listed companies and short sellers, which close positions after making stellar profits, keep this bull market for shares longer.
To date, the major beneficiaries of global fund flows are US corporate credit, US government bonds and liquidity. According to the data, mutual funds in the United States stand at the highest liquidity levels ever recorded. In addition, the market positioning of these mutual funds, and for many institutional investors around the world, is still very defensive. The combination of both of these should translate into limited downside risk for the equity markets, Barclays suggests.
Be careful and be on the alert because institutional investors have not bought on the March market downtrend. But then it is easy to conclude that the April-May rally in local and global stock markets, led by short sellers and daring institutional investors, will soon force the hand of prudent institutions. And therefore it will push the equity markets much higher. But Amundi analysts are not so convinced. The French company remains of the opinion that the risk remains very lively for risky assets. He therefore suggests that investors start making small allocations to market latecomers and cyclicals, but with a conservative and conservative view overall.
There are three key areas that could give the next big disappointment to current risk-ignorant equity markets.
- The Covid-19 pandemic. The markets have casually adopted the opinion that the worst is behind us and there will be no second or third wave. Furthermore, in the coming months we will have one of the numerous vaccines available;
- The economic recovery. Investors are willing to bet on positive scenarios based on huge fiscal and monetary support measures;
- The credit cycle. Credit markets discounted a first round of defaults, but not a second follow-up for traditionally overdue assets. Furthermore, the battle between liquidity and solvency is still far from being decided. Amundi is closely monitoring the U.S. commercial real estate sector.
The advice to investors is therefore not to chase the current momentum, but to play gradually and selectively the investment themes best positioned towards a slow road to recovery. Other risks to consider are, in fact, the growing tensions between China and the United States and the uncertain outcome of the imminent American presidential election. In addition, the idiosyncratic risks in emerging markets (such as Brazil) and the long-term consequences of this year’s pandemic (many not yet quantified).
Investors must therefore remain vigilant and cautious. This is why we are keen to repeat: be careful and be on the alert because institutional investors have not bought on the fall of the March markets. The proof is Citi’s Panic / Euphoria indicator, which now warns that market sentiment has returned to being a state of euphoria. History suggests that new pull backs will occur, although the exact moment remains unknown. But this does not need to mean another period of disaster and chaos.
From the beginning of what seemed to be the arrival of a bad bear market in February, they said that the path and duration of all that was expected would be determined by the flow and type of news, as always happens. In the past two months, the flow of news has been mainly positive, except for the humanitarian side of this crisis. This subsequently facilitated a surprisingly positive result for the equity markets.
What to do? And when?
uncommitted cash is most likely attracted to latecomers and low-price cyclicals when it decides to switch to risk assets. It will be interesting to see how, when and how many times the market momentum will change between the best performers so far (Tech & Growth + Quality) and the side fair of the stock market. Overall, it is perceived that with so much cash available, the purchase of retracements may have become the standard approach for many institutional investors. This, by definition, limits the downside risk, at least for the time being.
For investors who hold many of the quality and growth stocks in the portfolio, the main danger is that a sudden improvement in the economic outlook could trigger a fierce return of cash. Money that will flow into banks, commodities and other cyclicals, conditions similar to the switch that characterized the last quarter of 2016. The threat of such an abrupt transition in market dynamics is further exacerbated by the historically wider gap of the usually between Winners and Retarders.