Thursday, 1 May 2014
Chart of the Day - "Great Rotation" from Institutional Investors to Private Clients
"For a traveler going from any place toward the north, that pole of the daily rotation gradually climbs higher, while the opposite pole drops down an equal amount." - Nicolaus Copernicus
As we enter the "Sell in May" period, it looks like Insitutional investors have continued to be net sellers for the last five consecutive weeks and are, according to Bank of America Merrill Lynch from their recent Equity Client Flow Trends report of the 29th of April. Institutional investors have been the biggest net sellers year-to-date:
"Net sales by this group last week were their largest since January and the fourth-largest in our data history (since 2008). Hedge funds were net buyers for the fourth consecutive week, and private clients also continued their net buying streak. Clients sold both large and small caps but bought mid caps last week; year-to-date only small caps have seen outflows." - source Bank of America Merrill Lynch
Arguably the Chart of the Day is indeed the "Great Rotation" from Institutional Investors to Private Clients from 2008 to present:
- source Bank of America Merrill Lynch
From a shorter term perspective the "Great Rotation" by client type is as follows as per Bank of America Merrill Lynch's recent report:
"Weekly flows by sector, client & size (4/21-4/25)
Net sales last week were driven by outflows from Energy, Health Care and Financials. Tech saw the largest net buying amid better-than-expected earnings results from most companies in the sector. Discretionary and Telecom were the other two sectors that saw inflows. Tech is the only sector which has seen two consecutive weeks of net buying; Utilities has the longest net selling trend at five consecutive weeks.
Institutional clients led net sales last week, while both hedge funds and private clients were net buyers. By size segment, outflows were chiefly from large caps but also small caps, as only mid caps saw inflows." - source Bank of America Merrill Lynch
What is for us of interest is that we have been tracking for some months the convergence between Small caps and Utilities as displayed in the below Bloomberg graph showing the Russell 2000 index ratio to S&P 500 against the S&P500 Utilities Index ratio to S&P 500:
Although Utilities are seeing net selling trends, they are no doubt outperforming Small Caps' relative performance against the broader S&P 500.
We have been tracking with interest this convergence since beginning of 2014. This convergence should accelerate in the coming weeks as shares of smaller companies may be especially vulnerable to declines with market volatility rising, particularly valuation wise given that according to Bloomberg, the Russell index's price-earnings ratio increased to 49 in 2013 from 30 at the end of 2012. Russell 2000 companies have a median market capitalization of around $692 million versus the median value of $15 billion of the S&P 500 according to Bloomberg data.
On another note, shares of these smaller companies are destined for further declines in conjunction with the Fed's tapering which first impacted large capitalization companies, which have been more sensitive to interest rates such as Utilities. This is reflected as well in the above graph.
"The glory that goes with wealth is fleeting and fragile; virtue is a possession glorious and eternal." - Sallust