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Education Series: Single-Stock ETPs

Global Fund Managers Scream Capitulation

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

For the October edition of its iconic Fund Manager Survey (which has been covered several times before), Bank of America provides quite a few interesting takes from fund managers overseeing $1.1 trillion in assets. The results of the survey were released in closed-distribution format on the 18th.

The most interesting answer in the survey is that most respondents don’t think that Earnings Per Share (EPS) will be rising substantially on a global basis over the next 12 months.

As market stability risk metrics reached an all-time high due to monetary and credit concerns, cash levels rose to the highest levels since April 2001 at 6.3%.

Note: As in past articles, “cash” here implies an intent to sell and take short-term tax charges as opposed to long-term gains and possible tax benefits.

The survey also summarized that stocks and global growth among fund managers surveyed shows full capitulation – macro capitulation and investor capitulation followed by an eventual expectation of the start of policy capitulation as the Federal Reserve finally pivots away from raising interest rates.

However, the respondents are also of the consensus that the market will bottom by the first half of 2023 and have not seen significant outflows. Coupled with the high cash positions, it could be interpreted that the advice given to fund managers by their clients to essentially wait to sell after the other shoe drops.

Along with decreasing market liquidity has come the curious fact that 49% of the respondents stated that they aren’t overweight on stocks (or bonds, for that matter) but are overweight on cash, which supports the “waiting to sell” hypothesis.

Bank of America drew up a list of criteria for a “final low” in equity markets based on historical events and markets that unfolded. This comprised of eleven points, the first six of which were based on the results of the fund manager survey. BofA sees seven out of eleven points fulfilled, which supports the idea that a “bear trough” is still on its way.

Meanwhile, other reports released by the bank just before the FMS results were presented provide a lot of context for some of these assertions. Just as past editions of the FMS predicted, European equities have seen the longest period of outflows in over 7 years. Essentially, almost every month had seen a outflow out of European stocks in the Year to Date (YTD).

Another report seems to provide at least one theory as to why the respondents indicated they aren’t underweight in stocks. Over the year till date, both hedge funds and institutional investors have been net sellers (with private clients picking up some of the slack). In fact, all three client categories have been the biggest net sellers since the 2008 Financial Crisis, seemingly implying that a vanishing pool of individual investors are the ones who continue to buy in.

As it turns out, in yet another report, the bank indicates that the selloff has actually been in single name stocks. Inflows into ETFs – wherein the underlying stocks have to be physically held by the issuer – have been showing upticks in buying activity.

This largely confirms the hypothesis that the earnings results aren’t really triggering any large-scale buy-ins of individual stocks; a bulk of the rise over the past week or so can be attributed to ETF issuances and trading.

However, not all ETFs are included. ETFs centered around “high-conviction” themes have seen outflows both on a three-month basis as well as a 1-year basis while consumer discretionary and energy ETFs have seen “buy-in” activity.

Supporting the overarching thesis of the statements made in this report is a report released last Friday by Goldman Sachs, which stated that their equity portfolio allocation is shifting to a more defensive position. “The performance of short duration equities vs. long duration equities suggests that the equity market has not priced rate moves that have already occurred”, wrote Goldman Sachs strategist David Kostin. “Industrials” looks overvalued if earnings fall as much as expected, as are “Materials”. “Media and Entertainment” and “Autos and Components” are also at the bottom.

All in all, for long-term investors inclined to place faith that recent upticks imply the start of a long-term trend in rising valuations, it’s a handy lesson to not believe something that’s too good to be true in the macroeconomic context. However, in the context of short-term trends, there are plenty of use cases for short-term trading for scalping quick profits.

Exchange-Traded Products (ETPs) offer substantial potential to gain magnified exposure with potential losses limited to only the invested amount and no further. Learn more about Exchange Traded Products providing exposure on either the upside or the downside to the S&P 500 as well as the upside or the downside to the Nasdaq-100.

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Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

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