• Our Global Equity strategists have a few weeks ago called for bond yields to break higher, and see this
move likely to drive a change in market internals. While at the market level the initial reaction might
be cautious, as investors adjust to the new yields regime, they believe that equities will be able to
absorb higher yields. The correlation between equity and bond prices remains strongly inverse. Looking at
past instances of a sharp move higher in yields, they find that equity markets generally performed well.
At a sector level, higher yields would favour the outperformance of commodity Cyclicals such as Miners,
and Financials. Within Financials though, they remain unexcited by Banks given their cautious stance on
the Italian political situation. Our strategists believe that US banks are a better bet than Eurozone
Banks, and would also favour Insurance sector as a hedge on rising yields. Defensives such as Staples,
UK/UK Utilities and Real Estate are likely to be the losers of higher yields. Within DM, they keep OW on
US stocks over Eurozone. Relative growth, buybacks and earnings trends continue to favour the former.
Eurozone multiples don’t offer much support in a relative context, sector adjusted, and political
environment is likely to stay challenging.
• The equity fund buying by retail investors
worldwide reached $300bn during the first three quarters of the year. • But half of this flow took
place in January alone. So between February and September this year, less than $20bn per month was
invested into equity mutual funds and ETFs globally. • Such a pace is weak because it barely
reflects the reinvestment of dividends. Effectively outside the reinvestment of dividends, there has been
no fresh money being deployed by retail investors into equity funds since the February correction. • What explains this persistent cautious stance by retail investors? • We believe that the main
reason is that retail investors are overweight equities already and after buying a substantial $780bn of
equity funds between January 2017 and January 2018 they have become more reluctant.
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