fra zerohedge:
It has been one of the greater paradoxes of the record S&P rally from the February lows: how has the market continued to rise even with unprecedented outflows? In other words, “Who‘s buying equities?”
Overnight, Barclay’s chief equity strategist Keith Parker asks that very question, pointing out that global equities have continued to rally despite $128bn of outflows from equity funds since mid-March. His answer: futures buying (which has traditionally been associated with central bank intervention), whiuh since March ($60bn notional) has surpassed the amount of buying between October 2011 and May 2013,and which together with short-covering has more than offset the outflows.
He notes that with that dramatic shift in positioning basically done, retail and foreign investors are the incremental buyers/sellers of equities; S&P 500 returns have been 49% correlated with shifts in their combined ownership over the last 20 years. Active equity MFs are selling amid large retail redemptions while foreign investors are also selling US equities.
In other words, it may be all up to retail now:
“A turn in retail/foreign sentiment and a resumption of equity inflows would get markets back to more of a grind since the positioning-driven bounce has played out, but still elevated active manager positioning leaves the market vulnerable to risks.”
So, to better assess the path for equities and identify potential opportunities, Barclays seeks to better understand the buying dynamics across the investor and corporate landscape and provides the following observations:
- Since March, $60bn of net buying of US equity futures (notional) and $60bn of flow from short-covering in S&P 500 stocks more than offset the $50bn of outflows from US equity ETFs and MFs. Dynamics outside the US were likely similar. Short interest is back to 2015 lows and the equity HF beta is very high, leaving equities vulnerable.
- Equity MFs are net sellers given $164bn of redemptions since April, driven by retail. ETF inflows only offset some of the MF outflows. We are concerned that US equity funds are not prepared for a continuing redemption cycle with cash levels low.
- The rebalance into equities the end of June helped drive stocks higher, fuelled by the $2.5tr jump in the market value of bonds globally YTD ($1tr since May). The bond-equity correlation has risen over the last month, which is a risk to equity returns, and Fed comments at Jackson Hole (August 26) could be pivotal once again.
- Foreigners have been buying US bonds ($28bn per month) but selling US equities.Weekly data show that Japanese net buying picked up after May and spiked in mid- July, suggesting a return of the foreign buyer. Importantly, while net purchases of equities have fluctuated, gross purchases by Europe and Japan have surged, suggesting that QE may indeed be having a sizeable impact.
- With $1tr of annual dividends paid out globally and S&P 500 firms buying back over $500bn of stock on net, corporates remain the primary driver of equities. Strong Q1 buybacks likely primed the pump for the rally, but S&P 500 gross buybacks declined by $22bn in Q2 and 12m announcements are down $115bn YTD. Across sectors, actual net buybacks for healthcare and discretionary declined markedly from Q1 to Q2, while those for staples and financials rebounded sharply. Announcements for staples fell considerably, while those for technology rose and financials jumped.
- Across regions, Europe equity outflows YTD (-$85bn) reversed two-thirds of the post QE inflows and Europe MF positioning is underweight. EM equity MFs are also underweight as inflows have picked up. Across sectors, short-covering has been the primary driver of performance, but recent fund flows have gone to cyclical sector funds as defensives have had outflows. Across styles, small cap MF positioning is underweight as inflows picked up last week.
This brings us to the key disconnect: equity rally despite large equity fund outflows.
