00:00 

Patrick

Welcome back to the Barclays Brief. It's Monday, the 8th of June. Markets are moving around a lot. And I'm joined here today by Alex Altman who is our head of Barclays Equity Tactical Strategies. Alex welcome to London. Sorry about the weather. 

00:16  

Alex

Yeah a little bit grim outside. I imagine that's a little bit of how sentiment is at the moment with the market last week.

00:22

Patrick

Yeah. And you think the market is going to be a bit grim in the next few months, right. Because you turn tactically you bearish at the moment. Now you've had plenty of opportunities to do that. I remember in September last year the street was turning tactically bearish. You stayed bullish. In March this year during the war in Iran.

We had you on the show and you were talking about why you should stay the course and be positive on US equities. Equities rallied hard and markets got to all time highs. And it's now that you've turned tactically bearish. Why is that? 

00:52

Alex

So it really breaks down into a big melting pot of quantitative framework that the team uses. And a lot of that is being driven by the fact that cost of financing has exploded higher. So obviously real yields are a lot higher. That weighs on both the multiple for the equity market. We can statistically prove that. And also has cost of financing considerations just more holistically, which feeds into the equity supply narrative. The other aspect is just euphoria, retail euphoria but to a lesser degree institutional euphoria as well.

Again, we can measure all of this. We can see that retail euphoria is as high, in some cases even higher than what we saw in 2021. Bearing in mind we were in deeply negative real yields then versus positive real yields today. And then also just from an institutional framework that there isn't really any institutional bearishness left or whether it's on the AI narrative or beyond. 

That's not to say it's wrong, but in our experience, when we get to this level of euphoria, the forward return profile on the S&P just doesn't look that good anymore. 

01:57

Patrick

Yeah. Okay. Well let's let's talk about euphoria. Because the argument against this, and I'm sure you've had many clients disagreeing with your tactical shift, is, of course, that euphoria can last a lot longer than people expect. 

So what is it that particularly caught your eye in your framework that made you think, now is the time to shift? 

02:15

Alex

You're absolutely right. It's definitely not a binary. It's a gradual accumulation of different data points. So full disclosure or cautiousness began to bubble up about 2 to 3 weeks ago when we began to see evidence of this, whether it was from retail euphoria, whether it was from the positioning data, whether it was from the real rate dynamic, whether it was little quantitative signs.  

For example, one thing we look at spot vol correlation just for the layman terms. It's an illustration that people are reaching for the upside rather than the downside through options. And that we can we can we can measure that. So all of these began to cumulatively feed together into our framework. And and we know that our framework is typically a little bit premature. It's usually two weeks early or so. And it just gave us that sort of lead time to lean into a slightly more cautious view. But euphoria was just one aspect of it. 

03:09 

Patrick

Yeah. Talk about the retail investor, because we talked before about how retail exposure to the economy, to the stock market is rising to levels not seen before. Retail enthusiasm right now for equity exposure seems to be ramping up. And you've talked about this meteoric rise in demand for levered ETFs. How should we think about that?  

03:31

Alex

Yeah, levied ETFs is probably too much to unpack specifically just for this short podcast. But in summary, exchange traded funds that have levered exposure to underlying instruments historically was confined or vast majority focused upon major indices.

And then along came a bunch of single name levied ETFs, which was giving investors exposure to a certain security multiple times over. And again, there's a lot of nuance about how they get that leverage and, and the complications around trying to match the actual performance of what the prospectus says. But the bottom line is, is that the levered ETF, AUM assets under management have exploded over the past few years. 

You can trade in and out of S&P as much as you want, really. But when you get into single names, it can become more problematic and you get these potential tail wagging the dog scenarios where in order for these levered ETFs to rebalance themselves each day, they can end up driving a disproportionate amount of stock through the underlying channel.

And that can in turn become a self-fulfilling prophecy, where pushing stocks have gone up a lot up even more and vice versa to the downside. And I think that's basically, to a degree, what we've seen over the past few weeks. 

04:42

Patrick 

Yeah. Okay. So that kind of shifts the volatility dynamic on the single stock side. How should we think about the kind of bigger picture of the momentum trade here? 

04:52

Alex

So it's all tied to the same theme. So, if you think about concentration risk, semis and AI, the zeitgeist of the market. And then levered ETFs, the explosion in levered ETFs they're all effectively tied to momentum as well. 

Stuff that's gone up has become very long, momentum has become crowded. It's captured the imagination of the retail community and the institutional community. And as a consequence of that, you end up with a very crowded set of trades and a concentrated set of trades that is natural of a late cycle bull market or even a mid-cycle bull market.

And it just means that it leaves these, these trades vulnerable to these short and sharp corrections in the event of even small positioning adjustments or indeed small narrative shifts as well. And I think just that's essentially what we're seeing right now is a narrative and positioning shift just at the margin. 

05:46

Patrick  

Yeah, we look at the backdrop of US macro right now because the macro backdrop is actually strengthening. You know, we've had better than expected payroll data. We've had the JOLTS data pointing to hiring demand being in a strong place. ISM manufacturing is the strongest since mid 2022. So the data's beating expectations. But we've got a new fed chair who's just imposed. How does that play into your tactical view on US equities right now? 

06:14 

Alex 

Well so you’re right, the data has been strong. And part of that data, not exclusively, but part of it has to be inevitably tied to this AI CapEx cycle. So again it's all part of kind of the same trade. And so if you've got a bunch of hyperscalers that are spending, let's just call it from a rounded perspective, $1 trillion a year, that's $1 trillion spent equals $1 trillion of revenue to a bunch of non hyperscaler companies. 

And that again, not exclusively, but in part explains why corporate earnings growth in the US has beaten so robustly. It also explains why we're seeing an upturn in some of the industrial surveys as a result of that, again, not exclusively, but is certainly contributing to it. And that's the virtues of a CapEx cycle. Unfortunately, those don't last forever, of course. 

And when they do turn, it's usually as a function of overcapacity and so on and so forth. We have to acknowledge that the fundamental backdrop of the US equity market or the US economy is still relatively robust. And so, as a result of that, it's not a case of, oh my gosh, we're suddenly deciding that US equities or just equities are a terrible place to be putting money to work.

It's more just acknowledging the fact that even in a bull market or past higher, there can be pullups along the way, which effectively create opportunities from a tactical perspective. 

07:35  

Patrick

And one of those presumably is a new Fed chair. You've looked back at the data since what, the 30s thinking about that? 

07:40

Alex 

Yes, exactly. So we went back to the 1930s and basically a hundred years worth of data. And it is unfortunately a very strong statistical signal that when a new Fed chair gets put in situ, i.e. when they actually their first day in office, and we look at the S&P foward returns, they are unequivocally quite poor. And some get off more likely than others. And even if we remove remove some of the exogenous data points, for example, Greenspan, who got in situ right before the crash of 87. Terrible timing. Even if we remove those, we're still looking at a mid mid-single digit drawdown in the S&P over a forward three month time horizon. 

08:19

Patrick

Can we just pivot to IPO issuance? How should we think about that? Obviously there's a very large IPO calendar this year. How do you expect that calendar to impact market dynamics as well short term?  

08:30

Alex

So in the simplest terms the US equity market benefits from effectively negative net issuance every year and has done for decades now. And that's a result of the phenomenal buyback activity that that is that is prevalent in the domestic markets. And even with the expected IPO issuance this year, which could be in excess of $400 billion, that's before we consider follow ons and and lock up expires and whatnot. We're still going to end up with a negative net issuance of north of $200 billion. And so the IPO calendar itself is not hugely alarming. However the timing around those issuance of the IPOs could be quite lumpy. We don't know. We just don't know what the lock ups look like exactly. We don't know the timing of certain jumbo IPOs later in the year.

09:23

Patrick 

So yes, another thing for investors to watch out for this year. Okay. So if you put it all together, we've talked about cost of financing being higher, some euphoric signals in the market, some macro uncertainty with the Fed. And we've got the IPO issuance.

You've put this tactical bearish call out there. How much do you think the market could fall and what would trigger you to kind of lean back into a more bullish view?

09:46 

Alex  

So again we work everything within a quantitative framework or as much as we can. And we get our question a lot. So bearing in mind we've already fallen by 200-300 basis points in the S&P.

The framework as it outlines today we'll be looking for again around mid to high single digit pullback in US equities. Let's just call that between 6 and 7%. So maybe we're halfway done. Again nothing hugely dramatic and hugely scary at this point. Absent say a seismic exogenous shock. But what would get me more bullish again? I mean, first and foremost price.

Lower prices. Flush out some of the euphoria. That would be helpful. Seeing let's just say some of this issuance get digested well within the market. And price performance being robust on the heels of that, that would be another. And I suppose the other thing just to keep in mind is real rates. I do believe that the upcoming Fed chair meeting, the first one, obviously for Kevin Warsh, is absolutely important to set a tone to try and tether the cost of financing.

So when real yields are this high, it is a problem ultimately for the US equities. And if the Fed chair, it has the ability to try and jawbone those lower and provide some assurances, then I do think that would also provide the tailwind as well.  

So as it stands, we're not there yet. And again, price drives narrative. Having lower prices I think in itself will be a bit of a remedy. But absent that, we'd need to see those the signs of euphoria and those real rates lower as well. 

11:23

Patrick

Okay. Brilliant. Alex, thanks so much for joining me. It's been great to have you.  

11:26

Alex

Thanks again. 

11:27 

Patrick 

Okay, so I think the key takeaway is that this isn't about Alty calling the end of the cycle, but it is a non consensus tactical call recognising that the setup has become more stretched and the balance of risks has shifted.

So with rising retail euphoria, crowded momentum and ongoing Fed uncertainty, Alty’s caution is driven more by the technical setup than by any wholesale change in long term fundamentals for the US market. 

Thanks a lot for joining me. And as always, if you've enjoyed this episode of the Barclays Brief, please hit subscribe.  

Thanks for listening and we'll see you again next week.