Big money may soon be chasing the 'Robinhood' investor: Morning Brief
Monday June 15, 2020
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Institutional investors are under exposed on the stock exchange
One of the most fascinating stories in the financial world right now is the explosion of retail investors that are driving the current three-month rally on the stock market.
"The global pandemic brought private investors back to the stock market after being largely absent for a decade," Deutsche Bank strategist Binky Chadha wrote last week.
"They were major buyers of the stock correction."
The phenomenon has attracted the attention of more Wall Street experts who disagree as to whether this “robinhood” investor class is fueling the rally or not. However, they seem to agree on one thing: While the retail class has tidied up, the large institutional money has largely been lacking.
"By contrast, institutional investors' position in stocks remains extremely low (10th percentile)," said Chadha. "The stock position in our reading has risen from a record low in March to the low of its previous range."
Institutional investors continue to be underexposed stocks. (Deutsche Bank)
"Both the systematic exposure and the betas for [hedge funds] were quite low before the sellout on Thursday ... and are now probably even lower," wrote JPMorgan strategist Marko Kolanovic on Friday.
In another research report that dealt with the story, David Kostin of Goldman Sachs found that popular strategies in the institutional class, including mutual funds and hedge funds, had been working for some time but had underperformed in recent weeks .
"Between March 23 and mid-May, our long / short growth factor returned 9% and our momentum factor increased 2%," Kostin wrote on Friday. “This dynamic benefited institutional investors who had shifted towards growth stocks as the market shrank.
"However, since the middle of May, our momentum factor has decreased by 19% as the improvement in virus and activity data has driven investors into cyclical stocks, small caps and other economically sensitive stocks with a low multiplier share," he continued. "Shares with these characteristics were quickly accepted by value-oriented private investors and now make up a large part of our retail basket."
Strategies used by the retail class were professional smoking strategies. (Goldman Sachs)
All of this is leading to an upward trend as the economic environment continues to improve and institutions may be forced to pursue profits.
"Positioning tends to correlate with macro data and is an upside risk as growth recovers," said Chadha of institutional investors.
And the recent surge in volatility could further attract professional traders.
"If summer volatility remains at this level, systematic investors are likely to increase equity exposure and at some point HFs are likely to follow or buy the dips opportunistically," Kolanovic argued.
While retail history is unlikely to go away.
"Retail investment is high, but given the special circumstances (more savings, staying at home, replacing sports betting and online games, etc.), retail momentum is not changing (ie large outflows)," said Kolanovic.
By Sam Ro, Managing Editor. Follow him at @SamRo
What to see today
8:30 am ET: Empire Manufacturing, June (-30 expected, -48.5 before)
4:00 p.m. ET: Long-Term Net TIC Flows, April (- $ 112.6 billion in March)
4:00 p.m. ET: Total Net TIC Flows, April ($ 349.9 billion in March)
Second wave fears trigger strong sell-off in global equities [Yahoo Finance UK]
China's factory production increases, but consumers remain cautious [Reuters]
BP plans $ 17.5 billion amortization as oil price forecast drops [Yahoo Finance UK]
24-hour fitness filing for bankruptcy amid the onslaught of gym closings [Bloomberg]
Shares in bankrupt companies go banana even though companies are broke [Yahoo Finance]
YAHOO FINANCIAL HIGHLIGHTS
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The Federal Reserve deals with the links between monetary policy and income inequality
"Designed to fail": Two officials describe the government's problematic student loan program
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