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UBS Sees Capitulation As Hedge Fund Net Leverage Gets To 2009 Lows

By Kurt Osterberg · On February 13, 2016

“We see six signs of capitulation flows data,” begins UBS’s weekly European Flow Watch research note sent to clients yesterday.

According to the bank’s analysts, the six signs of capitulation in European equity markets in European equity markets are:

Banks: Investors have been net sellers of the banks the first time in five and half years. The recent risk-off move has seen the most net selling of any sector over January.

Country selling: On both a 12-week and 14-week view, Italy saw the largest net outflows since 2014. However, buying of stocks in the Core Eurozone area has spiked and has only been higher once since 2010.

Hedge fund net leverage at 2009 lows: Hedge fund net leverage is measured by UBS’s prime brokerage teams at 27%, the lowest recorded level since Draghi’s “whatever it takes” speech in summer 2012 and in line with levels previously seen in March 2009.

US investors have turned net sellers: US investors have become net sellers YTD of European ETF’s. What’s notable about this fact is that the selling is offsetting the structural growth of ETF’s.

US equity funds have seen the biggest outflow since March 2009: Following on from the above point, US equity funds have seen the largest outflow since March 2009 YTD. In January 2016, US equity funds saw outflows of $27.4 billion versus March 2009 outflows of $31.5 billion.

Cyclicals vs. Defensives: Cyclicals net selling has head to the highest level since the end of last August, and the outflows/inflows into these two sectors is reaching extreme levels.

Sentiment indicators are also showing an extremely bearish mood among investors. According to UBS’s research, the Stoxx 600 and the Bulls less Bears are both close to 2 standard deviations below their long-run average (shown in the chart below). However, UBS goes on to point out that, in the past, when bullish sentiment has been this low for European equities, over the next 12 months the European equity universe gone on to return c20%. Only time will tell if this will be the case this time around.