Investors remain heavily concentrated in US equities
US stocks continue to dominate global equity markets, but Barclays believes the first indications of a broader shift in investor positioning are beginning to emerge as concerns over crowded trades, artificial intelligence valuations and lower oil prices improve the outlook for Europe.
In a research note published on Wednesday, Barclays strategist Emmanuel Cau said US equity funds attracted a record $150 billion of inflows during June, while markets outside the United States “remained largely for sale.”
The bank also noted that concerns over a weaker US dollar have eased as economic growth has remained resilient and worries about the independence of the Federal Reserve have subsided, lifting long-dollar positioning back to its highest level since “Liberation Day” last year.
Extreme positioning raises reversal risk
Despite continued strength in US markets, Barclays believes investor positioning has become increasingly stretched.
The bank said flows into US equities relative to the rest of the world “look extended (>+1SD) vs. history,” suggesting that a period of mean reversion could become more likely.
Europe begins to attract fresh interest
Barclays said positioning among hedge funds and commodity trading advisers (CTAs) has started to improve across European equities, supported by lower oil prices and a broader diversification away from artificial intelligence-related investments.
Even so, overall fund flows into Europe remain negative, while investor sentiment toward UK domestic assets continues to be heavily bearish.
FOMO continues to support equity markets
Cau noted that although hedge funds and CTAs reduced risk exposure during June, those outflows were more than offset by record inflows of approximately $180 billion into long-only investment funds.
As a result, overall equity positioning remains close to historical highs as “FOMO still very much prevails.”
Fed policy remains a key market risk
Barclays identified uncertainty surrounding Federal Reserve policy under new Chair Kevin Warsh as one of the principal risks facing equity markets.
According to the bank, Warsh’s hawkish stance has contributed to higher real interest rates and tighter financial conditions.
Even with seasonal summer weakness and corporate share buyback blackout periods likely to increase volatility, Cau believes that “resilient EPS momentum continues to provide a key backstop to equities.”