LIVE MARKETS-Hedge funds behind equity selling, not foreign investors - JPMorgan

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HEDGE FUNDS BEHIND EQUITY SELLING, NOT FOREIGN INVESTORS – JPMORGAN

The recent selloff in U.S. stocks appears to have been largely driven by hedge funds, and there is little evidence so far of significant selling by foreign investors, according to JPMorgan analysts led by Nikolaos Panigirtzoglou.

The analysts looked at data including U.S. Treasury International Capital for February, the Bank of Japan's balance of payments data up to February and the Ministry of Finance’s international transactions data up to April 11th and concluded that “there is little evidence thus far of significant selling of US equities or bonds by foreign investors.”

Meanwhile the bank estimates that hedge funds have sold around $750 billion in U.S. stocks year to date, which includes sales made by strategies including equity long/short funds, both quant and discretionary. Momentum-driven hedge funds including Commodity Trading Advisors are also likely responsible for another $450 billion or so in sales.

“We believe that some (but clearly not all) of this selling of US equities by hedge funds reflects rotation to European and Chinese equities. However, much of the selling of US equities by hedge funds YTD likely reflects broad de-risking rather than rotation to other regions’ equities,” they said.

Meanwhile U.S. retail investors have continued to purchase U.S. equity exchange traded funds at a net pace of around $50 billion per month. And, “historical experience suggests that net outflows from US equities by foreign investors alone do not imply negative performance or underperformance of US equities vs. (rest of world) equities if domestic investors, particularly retail, continue to buy.”

JPMorgan notes that if the U.S. falls into a recession then U.S. stock prices and benchmark 10-year Treasury yields would likely be range bound for around a year, while credit spreads and the dollar would drift higher from current levels, based on historical patterns.

Alternatively, “if a US recession does not materialize the past three months moves in US asset prices would likely reverse,” the analysts said.

(Karen Brettell)

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