In a time of constant handwaving, hair-tearing and op-eds discussing the perils of the collapse in market liquidity due to central planning even as investing experts double down every single time there is a 1-2% "plunge" in the markets because, well, if you don't BTFD your HFT competitor will, one firm has decided to put its money where everyone else's mouth is. Actually, "pull."
According to Bloomberg, Sweden's largest fund manager, Swedbank Robur which oversees $138 billion in assets, has slashed its equity exposure in half at some funds "to avoid being caught on the wrong side of markets once the herd realizes stocks are over-valued."
In the funds with the broadest equity mandates, Sweden’s biggest fund manager reduced its equity exposure to about 30 percent in April from 80 to 85 percent in the second half of last year, Head of Multi Asset Per Storfaelt said in a June 11 interview in Stockholm, as reported originally by Bloomberg [8].
The reason for the stealthy liquidation: a diametrically opposing view to the prevailing conventional wisdom, according to which a "Grexit is contained", and certainly in complete disagreement with what Norway's Finance Minister Sigbjoern Johnsen who said in 2010 the reason why Norway's SWF invests [9]in Greek debt is because it is “investing for infinity” namely that there is massive future risk threatening to drive losses in Europe as a result of the ongoing Greek drama, according to Robur.
"In April, the majority of the market participants assumed that the drama in Greece was going to be solved in the end," Storfaelt said. “How did we play it? We took down risk more than we would otherwise have done. We still judge it will play out worse than the market expects."
It's not just the underpriced risks from a Greek contagion: according to Storfaelt the current environment has a far bigger inherent risk: a dumb "herd" of complacent bulls, who will one day realize just how massive the disconnect between fundamentals and valuations is, and run in the opposite direction. However, with zero liquidity on the other side of the market, there will be no escape.
Storfaelt says going with the flow is starting to look risky. "There are clear advantages to going against the herd at the moment,” he said.“You get more return taking less risk by not joining a herd that goes for an asset without fundamental backing.” Ultimately, investors are aware of the disconnect between fundamentals and valuations, so they’re “trigger-happy.” That means they’re ready to “reverse as soon as things shake a little,” he said.
Storfaelt says central bank stimulus in Europe has propped up markets and encouraged investors to expect a helping hand even though stocks are over-valued. But the question is whether the disbelief that ought to be kicking in can continue to be suspended.
The punchline, and a conclusion we absolutely agree with since it is something we have said since 2009: "he says the shortage of liquidity is a sign people are starting to doubt the sustainability of the current price environment."
Well, people have been doubting it for about 5 years, but with central banks always on the other side of the trade, and with Fear Of Missing Out, or FOMO, equivalent to career risk, nobody had a choice. The problem is that if one takes out the central banks from the backstop equation, the market has never been more one-sided and once the selling begins, there will be nobody to step in with the bid of first or last resort (the natural buyers in liquidations, the shorts, have long since been eviscerated). In fact, the only option will be to simply halt the market indefinitely. Just see Hanergy or CYNK as a case study of what is coming.
But back to Robur, which has made money on its contrarian stance in the past. In mid-2011, the fund bought up European equities, even though “everyone believed Europe was finished,” Storfaelt said. We “took a clear stance and aggressively increased the equity weight.” The deal ultimately paid off. Since the end of June 2011, the Stoxx Europe 600 index has gained more than 40 percent. “It is kind of the same situation now, but the reverse,” he said.
Storfaelt said Swedbank Robur sees a higher probability of a Greek default than the rest of the market. The risk “that it ends badly is higher than 50 percent,” he said. Pressure on Greece grew on Thursday as International Monetary Fund chief Christine Lagarde said the country won’t be given a grace period if it fails to make a payment at the end of the month.
“Market participants often make the mistake of assuming that everybody else -- for instance when it comes to Greece -- is driven by economic considerations,” Storfaelt said.“In Greece, the end-game will be much more driven by ideological beliefs and the question is where this will lead.”
Events today showed he was absolutely correct. For the sake of the bulls who looked at the market - which was being pushed up solely due to central bank intervention from the first moment of trading to crush any Greek negotiating leverage a red close may bring - and assumed that there is nothing at all that can dent the artificial, illiquid "bull market" now in its 6th year, let's hope that that is all Storfaelt is correct about, because otherwise the countdown to the next massive market crash, not to mention the next, and probably final global QE involving all central banks, has already begun.
