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08 July 2019

Investors are not buying the roaring bull market 

Global equity markets have had one of their best first halves in history, with the MSCI All Country World index gaining close to 15% over the first six months of 2019.

Even if we take into account that most of the gains merely offset the losses incurred in the last quarter of 2018, it remains a strong global advance with only very few countries (Chile, Qatar) not participating and registering a loss.

Remarkably, investors worldwide are not buying this roaring bull market and have actually been selling it. Equity mutual funds and ETFs saw net outflows of USD 154 billion over the first six months of 2019. Instead, investors piled into bond and money-market funds, which saw net inflows of USD 230 billion and USD 190 billion respectively over the same period. So where have the that gave global markets this impressive boost buyers come from? As far as the important US market is concerned, it is clear that US corporations have been a major force as they continue to buy back their own shares massively. US equity buybacks may again be close to USD 1 trillion in 2019, just like in 2018, with only US banks recently already announcing USD 129 billion in buybacks over the next four quarters. However, this does not explain the often equally strong returns of non-US equity markets, where buybacks are usually quite rare. Hedge funds have been building up their net long positions on average and have clearly been one source of liquidity. High-frequency trading vehicles that run on trend-following algorithms are likely to have been another source.

It is not strange that the average private and institutional investor has not been buying the rally. The global economy continues to weaken as the seemingly never-ending trade war between the US and China continues to undermine the confidence of both corporate CEOs and the general public. Corporate earnings are likely to disappoint in the coming quarters and it remains to be seen whether dovish actions by the main central banks are sufficient to keep the rally going when earnings growth turns negative. With US equity buybacks drying up in July as US corporations halt their buybacks until they have published their second-quarter results, US equity markets in particular appear vulnerable short-term.