Who Wants These Stocks?

2021’s stock-buying bonanza took what counted as a break during the first full week of June, but it was back with a vengeance in no time.

The latest weekly data showed investors poured $39 billion into global stock funds, the most since March.

That brought the YTD haul to an astounding $568 billion (figure below).

Back in March, I suggested it was probably foolhardy to “annualize” these weekly figures. With the year nearly half done, that no longer seems like such a stretch.

On that score, equity inflows are annualizing some $1.2 trillion, or nearly 8% of AUM. There’s no historical precedent for that — at all (figure below).

Amusingly, tech saw a sixth straight weekly outflow which, as BofA’s Michael Hartnett noted, made for the “worst streak since January of 2019.” That, just ahead of the Fed-inspired rotation back to growth shares, which manifested in the second-best weekly relative performance for the Nasdaq 100 versus the Dow of the year.

From a big picture perspective (i.e., forgetting how the flows break down by sector, style and region), how sustainable are equity inflows? Well, that’s obviously anyone’s guess, but if you ask Goldman, US households are likely to remain buyers for the balance of the year.

The bank this week lifted their forecast for full-year 2021 household net equity buying by $50 billion to $400 billion. “We estimate that households currently allocate 44% of their assets to equities, slightly below the all-time high allocation of 46% in 2000, but high cash balances and continued retail participation in equity markets should bolster household equity demand,” the bank’s David Kostin said, adding that “the tradeoff households face between equities and other asset classes favors equities through year-end given anemic money market and credit yields.”

At the same time, households are likely to be lured into equities by their appeal as an inflation hedge.

According to the new dot plot, Fed liftoff will commence right around the time Donald Trump is indicted, running for president again or both, but that’s a long time for idle cash to sit idle. And there’s quite a bit of cash on the sidelines. Specifically, around $5.5 trillion of it.

One should never say never, but IG and HY spreads don’t have much room left to compress and the recent long-end rally notwithstanding, Treasury yields are probably biased higher over the next few years (I guess — I’m really just parroting the boilerplate narrative here). That means credit returns could be lackluster, at best. That too favors stocks, according to Kostin.

“US equity fund inflows are on pace for the strongest [first half] since at least 2007,” he went on to write, in the same note. Some $170 billion has gone to domestic equity ETFs and mutual funds in 2021, with a bias towards value shares, consistent with the reflation narrative.

But it’s not just households. The corporate bid is back and with issuance set to abate, an acceleration in buybacks should leave corporates as the largest net buyer of equities for the remainder of the year, according to Goldman. (The emphasis there is important: You want to differentiate between gross and net corporate demand and when you think about “who” will buy stocks going forward, you want to take account of what may end up being seen as front-loading from households).

“Net corporate equity demand during Q1 2021 totaled just $26 billion as a result of the massive surge in issuance,” Kostin remarked. But the bank sees more than $720 billion of gross buyback executions for S&P 500 firms in 2021, and the pace should pick up materially from here.

As the table (above) shows, Goldman is sticking with their call for $300 billion of net equity demand from corporates in 2021, making them the likely biggest source of net demand for the balance of the year.

It’s worth noting that the aggregate allocation to stocks across households, mutual funds, pensions and foreign investors is now 49% (figure below).

That doesn’t quite match the dot-com-era peak, but it’s pretty close.

And, as Goldman remarked, it ranks in the 96th percentile going back four decades.


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