* Sector Rotation comes to an end: Hedge Fund Net Leverage picks up
The brutal sector rotation in April and early May caused many investors to
underperform benchmarks in H1. We still see the rotation as technically rather than
fundamentally driven – and the data on Hedge Fund Net Leverage backs this up. Net
Leverage for European Long/Short Equity Hedge Funds troughed at 34% in mid-May –
the exact week when sector rotation peaked. Since then, rotation has faded, price
momentum as a style is working again and Hedge Fund leverage is now back up at
40%
* Biggest net buying of core Eurozone since 2005
Investors were the biggest net buyers of Core Eurozone equities since we began
tracking the data back in 2005 (see Figure 2) – albeit on low volumes. In particular,
France and Germany saw large inflows. In the periphery, Italy has been preferred over
Spain. Going forward, we think Germany, having underperformed in H1, is a good way
to play a wider cyclical recovery and a weaker Euro.
* UK most unloved market…but likely to stay that way
The UK saw the most net selling of any major European market. But we would not use
this as an "inverse indicator" as flows are not yet at extreme levels and the
fundamentals look troubling. We see 4 reasons to stick with our caution on the UK
relative to Europe: 1) interest rate regime (we see the first UK hike in November), 2)
strong Sterling (a problem given c.75% of FTSE 100 revenues come from overseas), 3)
the UK market is not cyclically exposed and, 4) increasing political risks (Scottish
Referendum, General Election in May 2015 and potential EU Referendum in 2017).
* Great Rotation – Equities still seeing inflows, credit inflows slowing
Equity mutual funds and ETFs in the US are still seeing decent inflows – in June there
was over $20bn. In contrast, inflows to credit funds in the US have slowed to less than
$1bn over the month – the lowest since August 2013.