Albert Edwards has had something of a Damascene conversion. The City’s most notorious perma-bear described European equity as a ‘once in a lifetime opportunity’ and ‘unambiguously cheap’.
Speaking last week, he despaired of its intrinsic value being recognised, however.
According to the Financial Times, Edwards said: ‘Solvency, regulatory and asset/liability modelling arguments are forcing institutions into a sub-optimal asset allocation – and one from which they have no intention of reversing.’
In his opinion, repeated equity falls have pushed liability-ridden defined benefit pension schemes, not to exploit pricing signals, but to seek ever more valueless security in sovereign bonds.
While an intriguing take on the pattern of equity ownership over the last five years, Edwards might have been (at least partly) reverting to Eeyore–esque type. Because there are signs that the huge pile of money frozen into money market and bond funds is beginning to thaw and trickle into shares.
‘Thirty-nine billion dollars have been invested in US and global equity mutual as well exchange traded funds during the first 10 trading days of January,’ noted TrimTabs Investment Research chief executive officer Charles Biderman.
‘Compare that $39 billion 10-day flood of cash with the entire month of January 2012, when less than half of that amount, or $18 billion, flowed into equity funds.
‘Let us not also forget that January 2012 was a very good month for stocks. The S&P 500 rose more than 4%.’
The TrimTabs numbers add to a mounting pile of evidence that institutional investors may be beginning to have a change of heart. While the numbers quoted differ between different research bodies, the overall direction of travel remains the same.
Lipper data suggests that $18.3 billion flowed into US-registered equity funds over the week to 9 January, the fourth largest inflow since 1992, as the US fiscal cliff deal ‘encouraged some investors to put their money to work in the market’, according to Tom Roseen, director of research services
Of the $24.7 million total inflows into mutual funds tracked by the US Investment Company Institute in the first week of the year, $14.8 billion was allocated to equity, versus $9.76 million into bonds.
Similarly, funds analyst EPFR Global reported that equity fund flows had hit a five-year high in the first week of January, and retail investment hit its highest level since the third quarter of 2009.
As an aside, there was also good news for active managers, with equity inflows at their highest since EPFR began tracking in 2000.
This rebalancing, if continued, could be a powerful tide. According to Lipper, there remains $1.78 trillion in US money market funds alone, versus $2.23 trillion held in US-registered equity funds.
Reasons to be cautious
At least in the US, there are some reasons to be cautious, however.
Biderman points out that dividend payments bought forward to the end of 2012 to avoid higher taxes provided a natural one-off boost to investors who may well have simply reinvested their windfalls.
‘I estimate that at least $100 billion in extra income was recognised in late 2012. And that is the source of new cash for investments so far this year,’ he said.
‘Q4 2012 income was up $60 billion as a result of the front running of bonuses and the like and about $40 billion came from the sale of stock and other assets before year end.
‘The front running of what would have been 2013 income into the fourth quarter of last year will make 2012 year end look better.
‘But that lack of income this quarter will make the economy look worse than it would have starting now.’