Periphery hits Flow Watch peak: what's next?
* Net buying in European equities: US investors re-enter at fastest rate since 08 In Europe we saw net buying in equities for 2nd month running. Our Global Equity Strategy team flag that Europe-ex UK saw the greatest inflows of any region over the past month. Additionally, data from the US Treasury shows US investors moving back into Europe at the fastest rate since the start of the financial crisis. We think this will continue as still depressed European earnings start to climb back and uncover hidden value within. Please see: "Can European profits return to 2007 peak?", 2nd September 2013.
* Ready for a change in focus from Crisis to Cycle - as periphery hits all-time peak This month we saw the biggest flows out of safe havens like Switzerland and all time record flows into the periphery (figure 2). This is an expected post-crisis reversal trade, and other than a pause, it may run further. But we also saw money return to the Eurozone core. As the focus moves from 'horrible' crisis (safe havens) to crisis reversal (periphery) we think the next stop is back to the cycle. Germany and France are more cyclical and domestic than Switzerland, UK and Spain.
* Sector crisis reversal: biggest inflows into Financials, Domestics & Cyclicals Insurance saw the most inflows since February 2009 and Utilities saw the most net buying in over 5 years (since June 08) and it wasn’t just the periphery. The more cyclical German stocks RWE and E.ON (up 21% and 10% over the month) beat the UK crisis safe havens, SSE and Centrica (down 6% and 4%). They shunned the international consumer defensives, not only are they still expensive, but Unilever's warnings about EM slowdown and FX worries put added pressure on the 'crisis haven' staples.
* Are we too pumped up? Hedge fund net leverage back to peak level Net leverage is well above 2007 levels and has hit a peak only seen twice since 2007 (November 2009 and May 2010). Are we gearing up for a big recovery and more 'normality' or about to be disappointed? CREDIT VS EQUITY: we continue the YTD trend and flows into equities were more than double those into credit.