- Index investors remain overwhelmingly bullish on equities, despite the correction this month. Upbeat risk sentiment is marked by continual flows into Eurozone and Japan equity ETFs
- The growing support for equities provided by index investors may overwhelm active investors seeking to take profits and reverse December’s decline
- Helped by the rising risks to bond markets and lack of momentum in precious metals, the upbeat sentiment in equities may stay biased towards Eurozone and Japan and extend into the final weeks of the year
- Investors who share this sentiment may consider the following positions in equities and commodities (www.boostetp.com/products):
Long positioning equities:
Short positioning precious metals:
QE exit fears are balanced by a resilient US economy that sustains upbeat sentiment in risk assets. Index investors are tilting asset allocation decisions towards equities and away from bonds, which are prone to rising interest rates and from precious metals, which are stuck in a bear market. Underpinning the slumping prices in precious metals are the reversing flows in gold and silver ETFs since October that point towards redemptions increasing in December. This, in turn is bolstering the inflows into equity ETFs at the same time. The rising support of index investors may overwhelm active investors looking to take profits and reverse the correction in equity markets seen this month. Bullishness by index investors is expected to continue towards Japan and Eurozone equities. Investors who share this sentiment may consider the following positions in equities and commodities:
1.Boost TOPIX 2x Leverage Daily ETP(2JAL)
2.Boost EURO STOXX 50 3x Leverage Daily ETP (3EUL)
3.Boost LevDAX 3x Daily ETP (3DEL)
4.Boost FTSE MIB 3x Leverage Daily ETP (3ITL)
Short precious metals:
5.Boost Gold 3x Short Daily ETP (3GOS)
6.Boost Gold 2x Short Daily ETP (2GOS)
7.Boost Gold 1x Short Daily ETP (1GOS)
8.Boost Silver 3x Short Daily ETP (3SIS)
9.Boost Silver 2x Short Daily ETP (2SIS)
The broad based rally in equities has driven major benchmarks to attain new record highs during October and November. During this period the S&P 500 breached 1800, the FTSE 100 6700 and the DAX 30 9100. Equity ETF inflows appear to have been one of the main drivers behind these indices’ rise. As well as gauging the sentiment over the actual asset classes, the direction and strength of fund flows into ETF products serve as a useful indicator for bullish (or bearish) positioning by index investors. Gauging such sentiment by index investors and portraying it against the overall direction of market prices is shown in the chart above. The chart not only captures the asset allocation shift, but also indicates that ETF investors have been significant contributors driving the risk-on trade.
According to our research, Eurozone and Japanese equities have been the main beneficiaries of bullish positioning by index investors. During June to November, ETFs tracking Eurozone equity benchmarks have seen net inflows gaining strength from around 1% to 8% and affected equity markets to reach new record highs . Within the region, Italian equities have enjoyed most of the support from index investors, where net inflows have risen from 6% to 18% in the same period. Japanese equities, too, have seen renewed enthusiasm from index investors; the marked slowdown of inflows during summer has reversed sharply to bring overall bullish positioning of index investors halfway back to where it was in May/June.
Given the strength of the US economy, underpinned by gains in private sector hiring better than expected Q3 growth and upbeat sentiment by businesses and consumers alike, the bullish sentiment overhanging equities is likely to sustain itself in the final weeks of December. This is because alternative asset classes, most notably safe haven assets continue to be pressured by the outflows suffered in ETFs tracking US Treasuries, gold and silver. These outflows may help finance the bullish positioning in equities further out, thereby tilting the asset allocation shift in ETFs further, in favour of equities. With gold and silver stuck in bear market territory, while a strengthening US jobs market exposes the bond market to risk of higher interest rates, the overall bullish positioning by index investors could reverse the correction in equity market seen this month.
Set in this context, the profit taking in equity markets thus far, may largely have been instigated by active investors seeking to end the year on a good note. It does not appear to build on solid longer term foundations and may peter out. In what could be a modest rebound in the final days of 2013, investors may take the opportunity to leverage the bullish positioning in Eurozone and Japanese equity markets using Boost’s leveraged equity ETPs.
 Net inflows on the x-axis are calculated over a 3 month period and adjusted for the size of ETFs associated with the flows. The price trend on the y-axis are internally calculated and refer to the benchmark of the asset class ETFs track.
Boost ETP Research