Monday, June 15, 2020
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Institutional investors are underexposed to the stock market
One of the most fascinating stories in finance right now is the explosion of retail investors riding the stock market’s current three-month long rally higher.
“The global pandemic brought retail investors back into the equity market after being largely absent for a decade,” Deutsche Bank strategist Binky Chadha wrote last week.
“They were important buyers of the correction in equities.”
The phenomenon has caught the attention of more Wall Street experts, who are split on whether or not this ‘Robinhood’ class of investors is fueling the rally. However, they do seem to agree on one thing: as the retail class has been cleaning up, the big institutional money has largely been missing out.
“Institutional investor positioning in equities by contrast remains extremely low (10th percentile),” Chadha observed. “Equity positioning in our reading has risen from a record low in March back up to only the bottom of its prior range.“
Institutional investors continue to be undersexposed to stocks. (Deutsche Bank)
“Both systematic exposure and [hedge fund] betas were quite low even before [Thursday’s] sell-off… so are probably even lower now,” JPMorgan strategist Marko Kolanovic wrote on Friday.
In yet another research note exploring the story, Goldman Sachs’ David Kostin observed that strategies popular among the institutional class, including mutual funds and hedge funds, had been doing doing okay for a while, but underperformed in recent weeks.
“Between March 23 and the middle of May, our long/short Growth factor returned 9% and our Momentum factor rose by 2%,” Kostin wrote on Friday. “This dynamic benefited institutional investors, who had shifted toward growth stocks as the market declined.
“Since mid-May, however, our Momentum factor has declined by 19% as improving virus and activity data pushed investors toward cyclicals, small-caps, and other economically-sensitive, low-multiple stocks,” he continued. “Stocks with these qualities were quickly embraced by value-seeking retail investors, and now make up a large portion of our retail basket.”
Strategies employed by the retail class have been smoking professional strategies. (Goldman Sachs)
All this makes for a bullish setup as the economic backdrop continues to improve and institutions may become compelled to chase gains.
“Positioning tends to be correlated with macro data and represents an upside risk as growth rebounds,” Chadha said of institutional investors.
And professional traders may be further enticed by the recent spike in volatility.
“Over the summer, if volatility stays at these levels, systematic investors will likely add to equity exposure and at some point HFs will likely follow, or will opportunistically buy the dips,“ Kolanovic argued.
All while the retail story isn’t likely going away.
“Retail investing activity is high, but given the unique set of circumstances (more savings, staying at home, substitute for sports betting and online gaming, etc.), we do not see the retail dynamics changing (i.e. big outflows),” Kolanovic said.
By Sam Ro, managing editor. Follow him at @SamRo
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4 p.m. ET: Net Long-term TIC Flows, April (-$112.6 billion in March)
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