Shares are strong this year – but not all are impressed.
Several investors have dampened their enthusiasm despite the market recovery. While global equities rose 11% this year, $ 46 billion was pulled from equity funds, according to Bank of America Merrill Lynch.
This momentum has led to a "no-flow" rally, in which stocks had the strongest start in a year in 30 years, but investors withdrew money from the equity funds. In other words, their aversion to stocks did not match other forces driving the market higher.
According to Alain Bokobza, head of Societe Generale's Global Asset Allocation and Stock Strategy, investors must ensure the ongoing "tug-of-war" between bullish and bearish forces on the stock market.
What keeps the market afloat despite the cash outflows, share buybacks remain one of the trusted drivers of the profits of this bull market. Corporate tax reform has set share buybacks to a new record last year and, according to BAML, 201
However, many investors do not share the same enthusiasm for the future of stock prices.
"Risk aversion is now very obvious and portfolios are already hedged against many risks," Bokobza said in a recent announcement.
He continued, "Cash positions have indeed become very large as the prospect of a US recession in 2020 is not a prospect of high-risk assets."
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A US recession next year is no strangest to other strategists at SocGen. In a separate release, Arthur van Slooten and his team have highlighted the yield curve and its proprietary economic reporting indicator as two indicators suggesting that the next recession may occur sooner rather than later.
This risk helps explain why some investors were on the brink of this rally and even pulled money out of equity funds. SocGen pointed out that more and more of them are turning into cash instead of risky assets. it appears that they are meeting the widespread demands for more dry powder and using higher cash yields.
On the bullish side of the tug-of-war rope, Bokobza pointed out that monetary policy is still loose, that fears of a full-blown US-China trade war could decline and the UK could reach a Brexit deal.
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Bokobza does not urge investors to take a risk total assets because he believes some of the storm clouds will soon dissipate. However, he recommends a cautious "barbell" approach with three strategies that should help investors maintain exposure to stocks without completely burning them. They are listed below and quoted directly by him:
- "We do not match the current momentum and keep our stock weight at 40% rather low as we maintained our position at the end of last year despite our share index goals relative to the stock index We are still seeing a downtrend compared to the summer of 2020.
- "We are stepping up our allocation to assets that are helpful in finding returns, and now the priority that determines the reallocation of investors is determinedly enforced by the very restrained asymmetry of global central banks.
- "We focus heavily on risk control by adding assets with resilient properties and / or those that incorporate a de-correlation (ie: reduce volatility) into our allocation."