Fund holdings: Playing the upturn in global business cycle

Disclaimer & Disclosures Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it.  Global funds are shifting their allocations from the US into Europe ex UK and Japan Since October 2016, we have seen a trend of global funds making a significant rotation out of the US into Europe ex UK and Japan. Over the period, global funds have reduced their allocations in the US by 67 basis points (bps). In contrast, they have increased their holdings in Europe and Japan by 47bps and 19bps respectively. It is worth noting that the Europe ex UK and Japan equity indices have relatively high weights of industrials sector (c20% and c15%) compared to the US (c10%). It thus appears that funds are playing the current business cycle by increasing their allocations in the industrials sector. This rising optimism towards Europe suggests that investors are relatively relaxed regarding the political uncertainty facing Europe over the next 12 months. Steep fall in consumer discretionary holdings across all regions Fund holdings in consumer discretionary sector have fallen across all regions. Over the last one month, regional funds in the US, GEMs, Europe and Asia registered a fall in their weightings in sectors by 51bps, 11bps, 21bps and 5bps respectively. Our analysis suggests that financials, energy and materials have been the biggest beneficiaries. The global aggregate of fund holdings indicates that financials, energy and materials posted an increase in their holdings of 43bps, 16bps and 11bps in one month. Consumer durables is a contrarian call in Europe; Banks holdings turned positive in January 2017 Within the consumer discretionary sector in Europe, the majority of industry groups have posted a fall in their weightings and have underperformed the wider benchmark. Consumer durables stands out as a contrarian call. Here investors have started to increase their positioning from very low levels. The sector has outperformed by 3% y-t-d (as of 27 February 2017), among the top five industry groups in Europe, and one of the biggest pain trades for investors in Europe. European funds continue to increase their holdings in banks, which have turned positive for the first time since Q3 2015. Although the funds’ weighting in banks is higher than its long-term average, the sector is supported by a strong 12-month consensus earnings growth forecast of c13%, which is also at its highest level since Q3 2015. Measuring Fear and Greed Our proprietary data on the holdings of international investors allow us to establish when a cosy consensus is forming and to identify herd-like behaviour. By tracking holdings in high-beta or cyclical equities, we can also shed light on what these investors are expecting. Groups with low holdings tend to outperform – see Equity Insights: A new way of analysing fund holdings, 26 May 2011. Amit Shrivastava* Equity Strategist HSBC Securities and Capital Markets (India) Private Limited amit1.shrivastava@hsbc.co.in +91 80 4555 2759 Robert Parkes* Equity Strategist HSBC Bank plc robert.parkes@hsbcib.com +44 20 7991 6716 Eshan Raka* Associate Bangalore Issuer of report: HSBC Securities and Capital Markets (India) Private Limited 01 March 2017 *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations View HSBC Global Research at: https://www.research.hsbc.com Equity Insights EQUITY STRATEGY GLOBAL  Big rotation within developed markets out of US equity funds into Europe ex UK and Japan  Consumer discretionary sector has fallen out of favour across all key regions  Funds move overweight European banks for the first time since Q3 2015 Fund holdings: Playing the upturn in global business cycle EQUITY STRATEGY ● GLOBAL 01 March 2017 2  Non Euro markets drive positive fund flow into Europe Fund flow into Europe has mostly remained positive post the outcome of the US presidential elections. The key markets that contributed to positive flows have predominantly been the non-Euro countries – mainly Switzerland and Sweden. However, over the last four weeks, Euro-denominated markets have begun to catch up. In February 2017, fund flows in Germany and France were closely aligned to overall European fund flows. Increase in fund allocations in Europe ex UK & Japan Since end-October 2016, global funds have sharply increased their holdings in Europe ex UK and Japan. It appears that within developed markets, funds are playing the business cycle by increasing their allocations into the industrials sector. Europe ex UK and Japan equity indices have a relatively high weight in the industrials sector (c20% and c15%) compared to the US (c10%), where funds have reduced their holdings. Consumer Discretionary has fallen out of favour Fund holdings in the consumer discretionary sector have fallen across the board. In January 2017,