Why Barclays Thinks The V-Shaped Recovery Is Dead: "Massive Redemptions Are Coming"

Tyler Durden's picture

While one can speculate about the causes of today's global risk-on rally (as we did earlier today on two occasions), a more important question is whether after the recent historic rout (which as shown yesterday surpassed the volatility of the 2008 great financial crisis for various, mostly FX-linked assets), stock markets will simply brush it off, forget about all that's happened and as has been the case all too often in the past several years, surge in yet another V-shaped recovery.

According to Barclays, the answer is no.

As the firm's equity strategist, Keith Parker, writes today, active investors considerably increased risk exposures in the week leading up to the UK referendum. That trade did not play out as expected, and as a result this is where active money managers (MFs and HFs) find themselves now:

"By our measures, aggregate equity positioning by active managers is again near post-crisis highs as the market braces itself for a potential acceleration in redemptions after the equity collapse. With cash levels at equity MFs fairly low and net cyclical sector positioning near the highs, we believe managers are unprepared for outflows and lengthy risk aversion. Although there is cash on the sidelines, the current environment of heightened uncertainty gives rise to a “buyer’s strike” as investors wait for a sufficient value cushion to open up before deploying precious dry powder. Finally, short interest has considerable room to rise across cash equities, ETFs and futures."

Barclays goes on to add that it sees scope for "positioning to turn much more defensive at active managers and for equity outflows to pick up."

And the biggest wildcard, and the reason why we suggested recently BofA's "smart money" clients have pulled money in 21 of the past 22 weeks, not just existing redemption requests, but the threat of a surge in "massive redemptions" over the next few months. Here is Barclays: "Weak active manager performance YTD increases the risk of even larger redemptions in H2."

 

The bank's conclusion: "The positioning overhang coupled with the ‘prove it mindset’ of investors now, points to further equity downside risk as well as a prolonged market bottoming process like we saw in 2011-12, rather than the v-shaped rebounds that have characterized equity markets of late (like January)."

* * *

Finally, since this is a touchy topic for countless 17-year-old hedge fund managers whose only trading strategy during this "business cycle" has been to BTFD, here is Barclays' summary of the key points:

  • Composite equity positioning is 2std above average, at the post crisis highs. Funds increased risk exposure considerably in the week leading up to the referendum. US MFs and balanced funds are the most exposed currently, while Europe funds went from underweight to neutral.

 

  • Rebalance bid for equities at the end of month/quarter is unlikely to be material. Our implied US equity vs. bond allocation proxy is still well above recent lows as US equities are down just 3% in Q2. Additionally, the relative spike in equity vol vs. bond vol does not point to net equity buying by multi-asset funds. The rebalance bid may be more pronounced outside the US where the selloff was more acute.

 

  • Elevated equity fund betas combined with redemptions fuelled prior selloffs. US equity MF beta is 2.5std above average despite equity MF redemptions running $30-40bn a month. The selloffs in 2011 and 2012 were preceded by elevated MF beta, underperformance, and redemptions – which then helped fuel the corrections.

 

  • Short interest has considerable room to rise. S&P 500 short interest in single stocks is at 2.15% compared to about 2.4% at the recent highs; this implies nearly $50bn in potential selling pressure. ETF short interest is also at all-time lows and a rise to September levels would also imply about $50bn of selling pressure. Finally, S&P futures positioning is net long, compared to being net short in February.

 

  • Sector positioning turned much more cyclical heading into the referendum. Net cyclical minus defensive positioning by our measures has risen toward the highs, and is reversing. US equity MFs are the most cyclically positioned while global MFs and long-short equity HFs are closer to neutral.

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BorisTheBlade's picture

Only V-shaped recovery in the foreseen future will be in the amount of misinformation and propaganda. Brexit being local bottom.

froze25's picture

So this is what happens when people believe their own bull shit.

froze25's picture

So this is what happens when people believe their own bull shit.

yellensNIRPles's picture

DOW is up +140.25 as of this moment. Someone is either stupid enough to think there is a V-shaped recovery coming, or the algos have been tweaked to sell to dumb money, or both. 

Tall Tom's picture

 

 

 

Actually it is Jack Lew and the PPT working with the ESF's Deep Pool of Narcodollars.

 

But your idea is correct.

SuperRay's picture

Dumbass. Yellen said just the other day, the Fed doesn't buy stocks or manipulate the market. She's a Zionist Jew bitch and Zionist Jew bitches never lie. And the Rothschilds haven't been taking money from the Fed for the past 103 years. And it's called the Federal Reserve so it's a federal agency right? Can't believe how long this list is getting...

booboo's picture

Sell in June and smoke some choom

Consuelo's picture

 

 

I remember seeing a term for the first time on Jim Sinclair's site many years ago:

M.O.P.E.

 

Management of Perception Economics.

buzzsaw99's picture

ain't nobody afraid of the shorts no mo

Dead Canary's picture

My sister makes $2000 a week licking Bill Clintons balls. YOU CAN TOO!

www.lickbillysballs.com

 

RadioFlyer's picture
RadioFlyer (not verified) Dead Canary Jun 28, 2016 10:59 AM

all week long?  ay yi yi

 

and we know who's got the package in that family.

sudzee's picture

C/B's missing in action for 3 days. The last time something like this happened it took less than a day to print 20-30 trillion to soothe nerves. 3 days has to be unprecidented in the last 100 years. 

raywolf's picture

i dont see what all the fuss is about.... the brexit sell off is way less powerful and much higher above the 2015 Yuan deval sell off... and yet Brexit is far wider reaching and longer term....... BTFD

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Jun 28, 2016 10:56 AM

A V-shaped crash is more likely

TEOTWAIKI's picture

V for Vendetta

The film is set in an alternate future where a neo-fascist regime has subjugated the United Kingdom.

All Risk No Reward's picture

Did you sday "alternate future?"

Do you know that a neo-fascist regime currently subjugates the United Kingdom and the entire Western World?

No? Let me introduce you to them.

The Debt-Money Monopolist Mega-Corporate Fascist Empire Beast System, aka, Babylon the Great.

ft65's picture

Nothing is stopping the race to the bottom, it's just a case of whether the 1% will lose their soul before they accumulate the rest.

VAD's picture

their souls are long gone

wholy1's picture

The only "redemption" of consequence is . . . . YOURS that begins with . . . . REPENTENCE!

The Real Tony's picture

I guess everyone is waiting 'till just after the election to knock the DOW down to the 5,000 level or lower.

Squid Viscous's picture

but the really smart guests on CNBS keep saying there's cash on the sidelines, who to believe...

Never One Roach's picture

The banker down the street says people are cashing their 401(k)'s like crazy since they got little or no income and zero yield on their savings so they're grabbing their retirement plans. It's a side effect of Obamanomics compounded by the Bernank-Yellen Destruction.

Break_the_Bank's picture

And I'm guessing there are some of those 401k and IRA holders looking to get out of them, knowing that the government is bankrupt and may come after those easy to grab funds. Paying the penalties and fees may be cheaper than having the government exchange bonds for your hard earned retirement cash. 

hooligan2009's picture

kind of missing the point here - there is a natural bias to ALWAYS BUY the market because of 401k cpntributions.

last data I could find was to June 2014

As of June 30, 2014, 401(k) plans held an estimated $4.4 trillion in assets and represented nearly 18 percent of the $24.0 trillion in U.S. retirement assets

https://www.ici.org/policy/retirement/plan/401k/faqs_401k

point is that there are tens of billions a month getting put into the stock market, most of that in apssive taregt date funds that have average exposurea of 60-80%

the active bet is no longer the game - it is well establsihed that active managers lose money for clients, net of fees.

RMolineaux's picture

This item contradicts itself.  First it tells us that short positioning will add to the market downturn.  It then presents graphs showing that funds are already net short by wide margins.