Equity investors are becoming more defensive as geopolitical tensions and increasing macroeconomic uncertainty weigh on markets, according to a note from Barclays.
Analyst Rex Feng said this week that long-only investors are raising their cash levels, with overall long-only equity exposure now sitting at its lowest point in nearly a year.
At the same time, hedge funds “net sold US equities meaningfully across the cap spectrum,” indicating a broad shift toward risk reduction.
Feng noted that support for U.S. equities so far this year has largely come from capital inflows, particularly from European investors. However, he said that demand “started to wobble over recent weeks” and could become a “downside lever if headline risks worsen.”
Barclays said investor flows continue to favor Energy, Industrials and value stocks, while demand for Technology shares and yield-focused sectors appears to be stabilizing following earlier outflows.
Systematic investment strategies are also showing signs of caution.
Volatility-control funds remain positioned at relatively high levels near 80%, supported by currently subdued market volatility. However, Barclays warned that any increase in inflation-related volatility “would force sharper cuts.”
Commodity Trading Advisors have also moved defensively, reducing equity exposure to “near flat or short across regions,” while maintaining long positions in oil amid ongoing supply concerns.
The bank added that risk parity portfolios are shifting toward a more defensive stance as well, with commodity allocations falling “to near decade lows” and bond allocations rising to their highest levels in nearly ten years.
Meanwhile, options market activity suggests a return to macro-driven trading rather than speculation on individual stocks.
Feng said that although S&P skew recently reached five-year highs, the move “has been driven more by call selling than by demand for downside protection.” He added that put-to-call open interest currently sits at five-year lows and that “no signs of panic” have appeared in the market so far.