Man Group: Reflation trade leaves stocks “extremely expensive” as short-selling activity falls
The year-long reflation trade in equity markets has left stocks looking “extremely expensive” compared to bonds, with the volume of short positions now at its lowest level in some 15 years, according to Man Group.
After the S&P 500 recently slipped 1.6 per cent before rising 2.7 per cent earlier this month, various metrics tracking bond and dividend yields to each other, and to inflation, suggest stock valuations remain pricey, the London-based publicly-traded hedge fund and asset management giant said on Tuesday.
At the same time, shorting activity decreased over the course of Q2 as equities held up.
“Put simply, the year-long reflation trade we’ve experienced has left stocks looking extremely expensive compared to bonds,” Teun Draaisma (pictured), Portfolio Manager at Man Solutions, and Dan Taylor, Man Numeric’s CIO, wrote in a market commentary on Tuesday.
“This trend is not just confined to the US; Europe is the most expensive it has been since the dotcom bubble and Japan is fractionally under its highest reading in our dataset. The only exception is EM, and even here the reading is at the highest end of the neutral range.”
Elsewhere, the analysis showed the amount of shares borrowed for use in short trades fell from 4.8 per cent to 4 per cent a cap-weighted basis, and from 11.3 per cent to 10.4 per cent on an equal-weighted basis, during the second quarter.
“It seems fair to say that the reflation has driven shorts from the market; this represents the lowest level of shorting activity since the start of our dataset in 2006,” the note observed.
“However, while we have seen an overall decline in shorting, what activity there has been has seen a stronger inverse relationship with Value, Quality and Momentum over the course of the quarter.”