Of the major European sectors, only Telecoms and Utilities saw net buying in the last month (and last 12 weeks). Falling bond yields have driven investor enthusiasm for “bond-like” equities. But with 10yr German Bunds at 0.9% and Spanish 10yrs at 2.0%, we struggle to see another major move down in yields from here. Many of the materials sectors saw selling: Chemicals were the most heavily sold sector, Oils, Construction and Industrials also saw selling. Interestingly, Pharma had net selling despite strong relative performance.
European Hedge Funds have reduced net leverage down to 30% (from a recent peak of 37% in September – Figure 2). This is now close to back down to the low of 27% just ahead of Draghi’s “whatever it takes” speech in summer 2012. Gross leverage is at a YTD low, but still well up from 2012 levels.
Looking at strains and stresses in other asset classes, US High Yield credit funds have seen three months in row of outflows for the first time since end-2012. Also interesting to note that Japanese investors have turned net sellers of European bonds – for more details please see the Macro Keys: “Japan Flows: Time for L’Affaire Americain?” October 10.
Net buying of Italy has reversed sharply in the last months and Switzerland also saw heavy selling (tying with the net selling of Pharma). The UK is the only major European market that has seen net buying over the last month – displaying defensive characteristics in the downturn. But we would be cautious on the UK relative to the rest of Europe given the risk of interest rate hikes in the next 6 months and political risk going in to the 2015 General Election.