Investors lose nerve as Value rally falters: 5 signs
SIGN 1) There was $10bn of net selling of Europe ex-UK ETFs since end January. SIGN
2) US investors have been persistent sellers YTD. Having piled into European ETFs after
the first QE (15), the reaction this time was to sell (Fig 9). This offloading of 'Europe'
has pushed the Europe vs US 'sector adjusted' P/Book gap to a new paradigm (Fig 14).
Where has some of the Equity ETF money been going? European Credit saw inflows of
close to €6bn over the same period. For IG and HY it was c. €4bn and €2bn
Value & Cyclical rally hits Reverse. Value gap back up near tech bubble highs
SIGN 3) Value rally wanes: from 11 Feb to 28 April 'cheap' beat 'expensive' by 8.5%.
Today that beat has halved to 4.4% (Fig 4). The valuation STRETCH within sectors has
shrunk only 5% since 11th February (having fallen by c. 20%, Fig 16). It is rare for it to
revert back so quickly. SIGN 4) Net selling of Cyclicals: there was material net buying of
Construction & Leisure and some nibbling on Banks (& Italy). But, 9 cyclical/commodity
sectors saw net selling led by: Tech, Chemicals, General Retail & Media.
Hedge funds lose faith: net leverage falls – again – to all time crisis low
SIGN 5). In our last/11th February Flow-watch, hedge fund net leverage fell to 2009
lows and looked ripe for a bounce back. It started to, but reversed its path and today it
has fallen further, to below 2009 levels (of 27%) to a mere 23%, something akin to
the all-time lows seen at the peak of the euro crisis, Figure 60.
What's bugging investors? Global aversion, European politics & absent profits
We updated our Global Risk Aversion Indicator – it is still near early 2016 highs (Fig 3).
Plus investment in US mutual funds look confused. Not only were equities and bonds
recently positively correlated, but purchases of both have hit zero – a first in the chart's
20-year history. For Europe: the UK referendum (23 June) and its potential impact on
Spain's election (26 June) are factors likely to affect moods. Plus profits have worsened
over the past quarter and are back to levels seen 10 years ago. Not a lot to sink your
teeth into, unless UK and Spain pass uneventfully & profits perk up