Here’s something to put the equity rally in perspective.
That’s a chart of net flows into European equity funds from Citi. You can see that while investors rushed to pull out money in the latter half of 2008 — by record amounts — they haven’t exactly enthusiastically returned — yet. As the Citi analysts explain:
As William Shakespeare would have written, “Oh flows, flows, wherefore art thou?” Equity markets have rallied hard from March lows, up 40-50% in the UK and across Europe. But, this has been achieved with anaemic levels of net flows into equities. With returns from cash at record lows and with government bonds priced aggressively, is the stage set for money to return to risk assets, including equities? Historically it is flows (and earnings) that drive the second leg of market recoveries. Material flows can create that rare beast, the bull market. Despite strong returns already from risk assets this year, can investors afford to back the risk-free trade from here? With the bear exiting stage left, could the bull be entering stage right?
In this note, we check the euphoria levels in UK & European equities. We find little to shout about. The butchers, bakers, candle-stick makers and taxi drivers do not appear to be buying equities, yet. But, at least the sellers appear to have retreated to the shadows and there are some signs of returning confidence and investor risk appetite.
There’s more detail here, with lots of nice charts of various flows and ebbs, but if you want to cut straight to Citi’s semi-conclusion, it is this:
Investor euphoria remains hard to find in UK and European equities. The sellers have retreated, but the buyers are still largely absent. But, for how long can investors avoid equities? For some, such as Insurance companies, regulatory and solvency rules may keep equities out of bounds for some time. For retail investors, despite being burnt twice in the past decade, there are some early signs in the UK of recovering risk appetite amongst retail investors. We find it hard to argue in favour of low-return risk-free assets given the prospects for economic and corporate profit recovery and the modest valuations of UK and European equities.
Related links:
Cautiously, small investors edge back into stocks – New York Times
Bears, keep the faith – FT Alphaville