So far, so good. 2019 is shaping up nicely. The FTSE All-Share index is up 7.2% year to date, with the MSCI World up 7.1%. Over the last 12 months, the equivalent numbers 2.9% and 6% respectively and it’s only when we get to the 3-month mark that we see a small loss of 0.7% for the MSCI World. What’s really interesting is that most of the excitement so far has been purely about price. Most flows are subdued according to SocGen’s Arthur Van Slooten – he reckons that net inflows have hardly mattered. According to the SG analyst since the trough in December, total assets managed by the universe of funds that report on a weekly basis have increased by just 8% (from $18.8tn to $20.3tn) with only 4.2% of that increase in assets explained by the result of inflows and outflows. “Said differently, overall performance heavily depends on having selected an appropriate asset allocation. “
And what does that asset allocation currently look like? The chart below from SG nicely sums up the global positioning.
“ Equity is by far the biggest component (54%) and despite the setback in 2018, the current equity weight is higher than its average weight since 2010. This is what we call an implied overweight position on equity. Similarly, the 21% weight of money markets (cash) represents an implied underweight. “And within asset classes, especially equities? Fund investors have implied underweight positions on EM and Europe, whereas the US and Japan appear over-owned. On a sector level, Technology appears heavily over-owned, whereas Energy is the most under-owned.
Analysts at Deutsche Bank in the US point out that the S&P 500 is now back in line with current growth, “positioning is in the middle of its historical range ( see chart below), while vol has fallen sharply. Growth in the US has been weakening but is potentially bottoming in the rest of the world, the primary source of slowing last year. Against this backdrop, in the absence of large negative catalysts, we see demand-supply dynamics still supportive for equities”.
Other key observations on money flows from Deutsche Bank’s US team includes:
- “Rising yields should prompt a rotation away from bond funds and into equities….We also continue to expect a significant rotation out of money market funds, which has also historically helped equities.”
- “ Buybacks remain a strong source of support. The pace of announcements has picked up again over the last 3 months and our buyback baskets are outperforming strongly ytd”.
- “ Equity positioning is still in the middle of its historical range. Vol control funds are near full equity allocation and would sell quickly on a vol spike. However CTAs are still adding to long equity positions and risk parity funds will also likely be a tailwind as long as volatility stays low and cross asset correlations are stable. “
And now for the bad news – Europe, again
So, all in all, a fairly positive environment for equities – my potential ‘meltup’ is looking more likely by the day. But there is, as always, one slightly worrying note from the investment banking community. It’s from Barclays who’ve just announced the launch of their Barclays Augmented Credit Impulse (ACI), a compact gauge of lending and securities issuance data.
And the bad news? Europe is in trouble. Bank lending has decelerated while credit demand “seems relatively less buoyant recently…Econometric analysis confirms credit impulse shocks materially affect real activity…With the exception of Germany, narrow credit impulse indicators in the big four concur with euro area overall developments, dipping further into negative territory.”
If Barclays are right, expect the ECB to start loosening imminently.