Behold: The Incredible Flow-less Rally

One of the defining features of the YTD “Goldilocks” surge in risk assets is an absence of participation.

Or at least that’s the way it feels.

2019 has been just about as indiscriminate on the upside as 2018 was on the downside, but despite virtually everything posting positive returns since the December 24 nadir, analysts have variously noted a lack of interest on the part of fundamental/discretionary investors. Meanwhile, conditions haven’t yet ripened enough to pull in certain systematic strats.

“With declining volatility and rising prices, Hedge Funds increased their gross exposure, but they did not significantly increase net exposure”, JPMorgan’s Marko Kolanovic wrote midway through February, adding that JPM’s prime data showed net equity exposure sitting at just the 6th percentile while the equity beta of the global hedge fund index was still low (15th percentile).

“Multi-asset risk controlled portfolios still have very low exposure to stocks”, he went on to write, noting that based on his “survey of quantitative clients’ volatility targeting practices… the equity exposure and overall leverage of this market is still very low”  where that means close to the 10th percentile.

In the February edition of his closely-watched Global Fund Manager survey, BofAML’s Michael Hartnett described a “big fat buyers’ strike” as “global equity allocations in February fell to lowest levels since Sept’16.” Specifically, equity allocations dropped 12ppt to just a 6% overweight.

(BofAML)

Meanwhile, the number of respondents who were “overweight cash” in the February poll hit the highest level since Jan’09, as the net cash allocation jumped to 44%.

(BofAML)

With all of that in mind, Goldman is out with a short note that underscores the idea that this is a rally that nobody owns, so to speak.

“Inflows YTD into risky assets (equity + credit) have not been much higher compared to those into safe assets (government bond + municipal bond + money market funds) and equity and credit have only partly reversed their outflows at the end of last year”, the bank writes.

(Goldman)

Goldman drives the point home further, noting that while fund flows normally “tend to be correlated with equity performance, the current gap between equity performance and US fund flows YTD is one of the largest since the GFC.”

(Goldman) 

Specifically, the bank notes that although US stocks have rallied some 12% in 2019, US-based equity funds have seen just $3 billion of inflows. As you can see from the chart, these types of disconnects are rare.

“A similar gap occurred in 2016 when the S&P 500 rose sharply and flows remained weak due to ongoing growth uncertainty and political risks coming from Brexit and the US elections”, Goldman goes on to say.

In other words, this can happen when investors are concerned about global growth and political risk, which is precisely the case in 2019.

Of course there’s only so long people will be willing to remain on the sidelines. After a while, FOMO tends to get the best of everyone and the risk is that folks get “forced in” at just the wrong time.