Hedge Funds See Something in the Reflation Trade They Don't Like

[Dmitrij_111]

https://www.bloomberg.com/news/arti...-reflation-trade-they-don-t-like?srnd=premium

"Despite a rally of at least 40% in energy and financial shares over the five months, hedge funds -- on average -- have steadfastly shunned stocks in the reflation trade, favoring instead companies seen as resilient during an economic slowdown. Their exposure to cyclical shares sits at one of the lowest levels in a decade relative to defensive ones, industry data compiled by Bank of America Corp. show."

"What’s driving the aversion isn’t obvious. One theory is that hedge funds aren’t buying the return-to-normal narrative despite the rollout of vaccines. Last year, when retail investors rushed to hunt bargains in beaten-down groups like airlines and hotels, professional speculators were hesitant to chase pandemic-ravaged companies.

Another explanation holds it may be related to apprehension that economic acceleration, propelled by monetary and fiscal support, will lose steam once the latest federal spending wears out. Mike Wilson, an equity strategist at Morgan Stanley, is an ardent proponent advocating a shift to stocks better positioned to weather potentially disappointing economic data, such as consumer staples."

Thoughts?

 

[fan27]

All the more reason to be happy with my purchase of CLR and XOM today. Nice to own stocks that are not over owned.

 

[longandshort]

There's an argument that we are accelerating through a cycle, so fade early-cycle and start buying mid-cycle/expansion. It's a good argument tbh, but I would wait to see economic data peaking, and I don't think we will see that until the end of Q2.

 

[RedSun]

There are a lot question unanswered from that observation or article.

If the hedge funds did not participate in the rallies of energy and financials, then what groups propelled the rallies? You can't say that the individual investors funded the rallies. They like Tesla, Apple and Amazon.

We are just at the beginning of the current economic cycle. It will go for several years. With all the jobs added each month, folks will earn more disposable income for the mass lower tier. The core business is still very sound since most large businesses have not laid off any workers. With further government spending, there is no such thing of "latest federal spending waring out". The inflation and reflation will continue.

Things still go with textbook investing. In this economic cycle, the funds won't earn much by holding defensive positions like utilities or consumer staples. Less volatility yes, but low risk adjusted returns.

 

[RedSun]

There's an argument that we are accelerating through a cycle, so fade early-cycle and start buying mid-cycle/expansion. It's a good argument tbh, but I would wait to see economic data peaking, and I don't think we will see that until the end of Q2.

No such thing of peaking. We just got started. I figure most of the "black box" still programmed according to textbook economic cycle and all the correlations.

 

[longandshort]

No such thing of peaking. We just got started. I figure most of the "black box" still programmed according to textbook economic cycle and all the correlations.

I generally agree that revenue and earnings expectations for FY 21 are too low given the risk of 7%+ growth. But peaking doesn't mean a subsequent contraction. In an early cycle market, rebound in activity drive the spread between earnings growth and the cost of capital. As the economy stabilizes in its trend, the cost of capital begins to rise. Yields on the US 10yr have risen 150% since the beginning of the year and will likely hit 2% this year. The cycle is already shifting...

 

[RedSun]

I generally agree that revenue and earnings expectations for FY 21 are too low given the risk of 7%+ growth. But peaking doesn't mean a subsequent contraction. In an early cycle market, rebound in activity drive the spread between earnings growth and the cost of capital. As the economy stabilizes in its trend, the cost of capital begins to rise. Yields on the US 10yr have risen 150% since the beginning of the year and will likely hit 2% this year. The cycle is already shifting...

Cycle of shifting what? The economy already peaked and declining is coming later this year? That would be just so amazing and amusing.

This economy has a lot of strength. Sure we can have a near term peak over the summer for the huge recovery. But the economy will still be steady. As to the interest rate, you are comparing with the near zero rate. Even it is a 300% rise, it is still low rate. 2% is really nothing to worry about. On the corporate bond market, it is the credit spread, not the fed bond yield that matters.

 

[longandshort]

Cycle of shifting what? The economy already peaked and declining is coming later this year? That would be just so amazing and amusing.

This economy has a lot of strength. Sure we can have a near term peak over the summer for the huge recovery. But the economy will still be steady. As to the interest rate, you are comparing with the near zero rate. Even it is a 300% rise, it is still low rate. 2% is really nothing to worry about. On the corporate bond market, it is the credit spread, not the fed bond yield that matters.

And those spreads are tightening.

A shift in the cycle means sector rotation. So moving out of, say, materials and into software.

 

[RedSun]

And those spreads are tightening.

A shift in the cycle means sector rotation. So moving out of, say, materials and into software.

Sure good luck with that. Tesla to $900 or to $3,000 as Ms. Woods said? Maybe some day, not yet. Not sure what hedge funds follow that. Maybe Mr. Billy Hwang thought about that....

 

[RedSun]

Here is what one of the large hedge funds has been doing. Beaten-down stocks like retail, airlines and banks. Energy should be part of that too. Clearly BofA research missing the marks. Their info could be outdated.

A clutch of hedge funds including Maverick Capital has ridden a surge in beaten-down parts of the equity market to post large gains so far in 2021. Despite losing about 9 per cent in its flagship hedge fund in a choppy January, Lee Ainslie’s Dallas-based Maverick, which manages $11bn in assets, gained roughly 25 per cent in February and a further 20 per cent last month, according to figures sent to investors and seen by the Financial Times. The bets on previously unloved “value stocks” in sectors such as retail, airlines and banks has left Maverick up about 36 per cent in its flagship fund this year to late March, making it one of the world’s top-performing hedge funds, according to numbers sent to investors. Maverick declined to comment.

https://www.ft.com/content/37049472-fcd6-491e-a8d9-4d60ed82df8f