Biggest-Ever Move Out of Stocks Could Foreshadow Gains Ahead

(Bloomberg) --

A $1.1 trillion shift out of equities and into bonds and money market funds during the last year marks the biggest asset-class rotation in history, according to research from quantitative strategists at Sanford C. Bernstein.

“If history is a guide then such periods of outflows tend to see somewhat better equity returns over the following six months,” analysts including global head of quantitative strategy Inigo Fraser-Jenkins wrote in a report dated Sept. 23.

Investors have bet big on global fixed income this year as the U.S. Treasury curve inverts -- typically a recession indicator -- and the country’s trade war with China shows little sign of resolution. The stockpile of negative-yielding debt across all markets hit a record late August.

Biggest-Ever Move Out of Stocks Could Foreshadow Gains Ahead

That preference for bonds is now showing signs of changing course.

Flows into equities jumped to $19.2 billion for the week ended Sept. 18, the most in a year-and-a-half, according to EPFR Global. Inflows in the past two-week period to U.S. stock markets were the highest on record, strategists from Deutsche Bank wrote in a note. And Bank of America Merrill Lynch analysts in a note Friday said “flows are risk-on,” noting investor sentiment is extremely bearish.

“If you look at valuations, the equity risk premium of equities versus bonds is still very much in equities’ favor,” said Colin Graham, chief investment officer for multi-asset solutions at Eastspring Investments in Singapore. “It’s only really the U.S. that’s close to its all-time highs,” while other markets still have much cheaper price-to-earnings ratios, he said.

While noting the turn to inflows over the past two weeks, Bernstein said the $33.6 billion flow to global equity funds “needs a magnifying glass to see it on the chart.”

Still, there are reasons behind the outflows seen in recent months, and they haven’t necessarily gone away.

“The growth momentum is mediocre at best,” said Tai Hui, chief market strategist for Asia-Pacific at J.P. Morgan Asset Management. “The global backdrop isn’t awfully constructive for equities. That’s why you’ve seen a lot of investors shift their allocations into fixed income.”

©2019 Bloomberg L.P.

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