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Hedge funds have slashed their bets on a rising US stock market to the lowest level in at least a decade and pivoted to Europe over concern about the resilience of the US tech-led rally.
Prime brokerage data from Goldman Sachs shows that hedge funds have the lowest weighting to the US stock market since the records began in 2013 while raising their bets on European stocks to the highest ever level.
Alison Savas, investment director at Australia-based Antipodes Partners, said the US rally led by the likes of Nvidia, Apple and Amazon had left some companies looking overvalued relative to their earnings potential.
“It’s hard to justify the multiples of many of these [US] tech businesses,” said Savas, whose firm manages $10bn in assets and has allocated about 30 per cent to Europe, higher than the local index weighting. “We agree Nvidia is a great business, but as a value investor we can’t make that multiple work.”
“We are investing in mispriced multinationals [in Europe] which are priced at a discount to similar businesses in other markets like the US,” she said.
The Nasdaq Composite recorded its best first half of a year in four decades and is up about 31 per cent year to date, while the S&P 500 has gained about 15 per cent. However, with the Federal Reserve set to raise interest rates further to try to combat inflation, which many commentators expect will trigger an economic downturn, some managers believe the market’s narrow rally could soon reverse.
European stocks, meanwhile, have been more subdued, with the region-wide Stoxx 600 gaining about 5 per cent and the FTSE 100 in the red this year.
“Hedge funds are starting to position for downside risk in US stocks”, wrote Goldman analyst Vincent Lin in a recent note to clients.
Funds that look to profit from picking individual winners and losers have found scant opportunities in a market where a clutch of highly valued shares have driven the bulk of the gains, said Samantha Rosenstock, head of investment research at Man FRM.
“The long-short managers don’t see much dispersion between companies,” she said. “Conversely in Europe, the valuations are lower so they are more attractive.”
However, other investors are positioned differently. For instance, call options data, a measure of sentiment, shows that investors are not particularly attracted to the EU blue-chip index the Euro Stoxx 50.
As interest rates rise, “value stocks should outperform growth stocks, which is usually better for Europe,” said Ankit Gheedia, head of equity and derivatives strategy for Europe at BNP Paribas. “But I would be cautious selling US tech and Nasdaq outright.”
One executive in prime services at a large US bank warned against betting on Europe to outperform, pointing out that the US economy has so far proved resilient despite rising rates.
“The majority of people were expecting a recession and they thought the valuations in the US were outpacing the reality,” said the executive. “But then the equity market rallied roughly 10 per cent over the last one to two months.”
Additional reporting by Laurence Fletcher
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