Rudi’s View: ABC Of Equities Recovery Rally

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Jun 04 2020

Dear time-poor investor: if this week’s data insights don’t surprise you then I don’t know what will

In this week's Weekly Insights:

-ABC Of Equities Recovery Rally
-Banks Are Cheap, But…
-Rudi Talks
-No Weekly Insights Next Week

ABC Of Equities Recovery Rally

By Rudi Filapek-Vandyck, Editor FNArena

Investors are constantly plagued by questions for which there’s not always an easy and straightforward answer available.

How much exactly is the landscape for retail landlords changing? Is the trend towards less globalisation irreversible? What stocks and sectors are being impacted by riots in streets across the United States?

Probably the most important questions right now are, after such a strong recovery from beaten down index levels in March, how much upside is left in the short to medium term, and what is most likely to happen next?

Recent share market updates by analysts at Citi and Barclays, based on financial data insights provided by EPFR, will surprise most of you, but also provide some important clues.

Looking for Answers

Financial intelligence platform EPFR specialises in digging into global funds flows capturing both large institutions and retail investors.

EPFR data, but more so the insights derived from the data, are highly sought after by market analysts and strategists trying to decipher the global mood and latest movements.

Picture their surprise when the latest data update showed virtually nobody had been buying post the March 23 bottom in global equity markets.

Net funds flows into global equities have been on a sharp downtrend ever since the late 2018 conniptions, and calendar 2020 has simply continued that trend. Moreover, institutional investors including hedge funds kept on raising more cash as equities started rallying into April and May.

This raises two obvious questions:

-who has been buying in the past two months?

-what do these institutions intend to do with all that cash now equity markets have rallied so strongly?


Let’s tackle the first question first, as I am sure I now have your attention.

Declining funds flows while equities are rising is not as unusual as we all tend to think. Instinctively, it doesn’t make sense, but in practice equities can rally higher, and continue rallying higher, while more investors are withdrawing their money from equities.

It happened during the euro-crisis of 2011/12 and extended post-crisis further into 2013. It happened again in 2018/19.

Previously, buybacks from a growing number of US companies are believed to have made up the key difference.

This time around US companies have -for obvious reasons- stopped buying in their own shares.

So who has been buying instead?

Both Citi and Barclays point the finger at the same source: short sellers closing out their positions.

While in Australia there is anecdotal evidence the sell-off into March has attracted many fresh and returning retail investors, the EPFR data suggest no such retail participation revival has taken place in the USA.

Also, while the local ETF industry seems to have seen a boost of fresh inflows on the back of heightened market volatility, again, EPFR data reveal both active and passive money flows have declined so far this year globally.

It seems Australia has danced to its own tune post March 23. Australian indices still underperformed US benchmarks, and by quite the margin too.

After falling further than US share indices, the ASX200 had recovered by nearly 31% at the end of May with the S&P500 up 36% and the Nasdaq up 38% over the same period.

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