investment viewpoints
Positioning: to the rescue of tech stocks
Last week’s focus was on real rates rising while growth stocks kept outperforming value ones. This week we follow up with a focus on one of the potential explanations to this situation: positioning.
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US tech leads returns
The macro situation remains quite uncertain at the moment. This, in our eyes, is all the more reason to start looking at other potential factors to explain market returns. Sentiment, and more importantly positioning, could very well drive markets in the coming weeks – taking the lead once more until the first few days of September – making it worthy of investigation.
If the return of more positive sentiment explained January’s performance globally, the recent equity breakout is probably the reflection of something else, and this week’s Simply put takes a look at equity positioning among institutional investors: US tech once more leading equity returns must be raising questions for investors, and this is part of an explanation.
Light market, heavy market
Monitoring the positioning of investors – be it for retail of institutional investors – is a tricky thing. Very much like volatility, positioning is not observable per se, as the anonymity of trades on markets is part of how these markets remain as efficient as possible. Usually, there are three ways around this positioning problem:
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Firstly, monitoring the flow of funds, when possible, can yield some hints here and there. These data are typically backward looking and are produced by brokers, making their usage somewhat complex
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Secondly, replicating quant strategies can help investors understand how the average CTA or risk-based solution is currently changing its allocation. Even though these strategies have been rumoured to drive the market at times, their assets under management are likely too low to really matter
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Finally, one can estimate the beta of various types of investors to different asset classes. With weekly or daily data, a simple trailing regression can help explain how these investors are adjusting their exposures as the environment evolves
Figure 1 shows a typical example of this third solution, using the HFRI Macro Index and regressing its returns on different types of equity indices, including the Nasdaq. What this chart shows as a key message is the following: despite an improvement in sentiment since the beginning of the year, only European equities and emerging-market equities have been seeing more interest from global macro hedge funds.
On the chart, a higher beta means a higher average exposure of these macro funds. The Nasdaq is not the place where investors have been eager to enter again – and probably explains how European stocks have reversed last year’s drop, but not the Nasdaq, even though things are improving now. Last year, global macro positioning was light on all types of stocks, while this year it has progressed unevenly. But are these global macro funds representative of the average investor?
Figure 1: 26-week trailing beta of the HFRI Macro Index to different equity indices
Source : Bloomberg, LOIM
Well, pretty much
Figure 2 shows a recapitulative set of charts of three different types of hedge funds: CTAs, macro, and equity market-neutral funds. The situation is strikingly comparable across the three of them: European and emerging-market exposure has increased globally in their books, but not the Nasdaq. Even in the case of equity market-neutral strategies, their beta has decreased – they have recently, as a group, pushed their portfolio further away from growth stocks even if only by a small proportion.
What we have recently been faced with is a market in which the ’hot money’ deployed by fast institutional investors has chased anything but growth stocks, creating a large positioning gap. What has happened historically when such a situation occurs?
Figure 2: 26-week trailing beta of different HFR macro indices to different equity indices
Source : Bloomberg, LOIM
What happens when the gap grows?
Figure 3 offers a view of the average subsequent return obtained from the MSCI World in four different positioning situations:
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When the positioning is above average and rising
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When the positioning is above average and declining
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When the positioning is below average and declining
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When the positioning is below average and rising
By slicing and dicing history for these four possibilities, and looking at different holding periods, one would obtain the chart presented in Figure 3 for the 2001-2023 period. Two key conclusions can be raised from that chart:
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First, when positioning is low, it usually is a contrarian indicator, and returns obtained in the coming months are positive on average
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Second, when positioning is high and declining, that is the moment when investors should become more cautious in their exposures
At the moment, emerging-market and European equities are in a high and rising situation that remains inconclusive from Figure 1. The Nasdaq is a low positioning asset, according to our estimations, and that is potentially where we could see an upside risk. Investors who had ditched their exposure to growth stocks at the end of 2022 will probably be running after the market.
The current tech rally is probably tied to this positioning effect, driving with it the rest of the equity market. Once again, as long as the macro situation remains unclear, and markets are assuming a soft landing is happening, these positioning effects could prove essential to navigate the current waters.
In this context, the large-cap tech sector can also appear at the moment as a defensive growth exposure: these large caps could look appealing now for their ability to resist to the fluctuations in the business cycle, now that earnings risk could materialise in the coming months. The current uncertainty would therefore support these stocks, while a rapid macro recovery would support smaller stocks (leading to an interesting rotation). Let’s see what sentiment and positioning can do to this rotation.
Figure 3. Average returns for different kinds of positioning situation on global stocks in hedge funds
Source: Bloomberg, LOIM
| Simply put, growth stocks were under-owned across the first half of the year, leading to a brisk rise in their prices as the situation normalised. This is probably not over yet. |
Macro/nowcasting corner
The most recent evolution of our proprietary nowcasting indicators for global growth, global inflation surprises and global monetary policy surprises designed to track the recent progression of macroeconomic factors driving the markets.
Our nowcasting indicators currently show:
- Our growth indicator held steady over the week, continuing to point to a form of stabilisation in global growth
- Global inflation should continue to decline, with our inflation indicator remaining low. Today, its diffusion index contains 50% rising data, compared with 38% a month ago: inflation has not said its last word
- Monetary policy should continue to gain in stability: this remains the message from our monetary policy nowcaster
World growth nowcaster: long-term (left) and recent evolution (right)
World inflation nowcaster: long-term (left) and recent evolution (right)
World monetary policy nowcaster: long-term (left) and recent evolution (right)
Reading note: LOIM's nowcasting indicators gather economic indicators in a point-in-time fashion to measure the probability of a given macroeconomic risk - growth, inflation and monetary policy surprises. The Nowcaster ranges from 0% (low growth, low inflation and dovish monetary policy) to 100% (high growth, high inflation and hawkish monetary policy).
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