- The analysts discuss the resulting factors that have left equities primed to rally over the next few months.
- Corporate buybacks and mergers and acquisitions have supported stock-market growth, even as investors have fled equities.
- Read more on Markets Insider.
In the last year, investors have pulled a record $1.1 trillion out of equities and moved the money into bonds and money market funds, according to data from Bernstein. That marks the largest such shift in history.
That could mean that equities are set up for gains in the near term, says a team of Bernstein analysts led by Inigo Fraser-Jenkins.
"If history is a guide then such periods of outflows tend to see somewhat better equity returns over the following 6 months," Fraser-Jenkins wrote. "That message is echoed by the continuing repatriation of overseas equity investment by global investors."
When investors move money into safer assets like they have lately, it's usually a sign that they're getting too pessimistic, Fraser-Jenkins wrote. It can ultimately function as a contrarian signal that stronger stock returns are ahead, he said.
This relationship between selling and forward returns can seem counterintuitive. But there are reasons that markets are up this year even with the large outflow from equities, Fraser-Jenkins wrote.
One reason for this is that investor selling has been "swamped" by corporate buying, Fraser-Jenkins said. Global corporates have announced $820 billion in buybacks this year, which has exceeded selling by traditional investors. That's been supportive to the market as a whole, since when companies reduce their outstanding share count by repurchasing units, it lifts the per-share value of the remaining stock.
In addition, companies have $1.3 trillion in pending mergers and acquisitions, which he says also supports the equity market.
Fraser-Jenkins also says that this pattern can be sustained over long periods of time. He also points out that other things, such as asset owners choosing to leave the equity market to invest in private companies, are driving this trend.
The report also breaks down that while there have been flows out of equities globally, investors are fleeing some places faster than others. European equity funds have seen $97 billion in outflows from investors, although the pace of selling activity is slowing, wrote Fraser-Jenkins.
US equity funds have suffered in 2019 as well, but not as much as Europe, the analysts found. While total outflows for the year are $30 billion, investors have been making strong net purchases recently, resulting in the biggest inflows since March
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