Global equities, after a robust start to the year, have seen pullbacks in recent weeks. The downturn comes amidst a backdrop of stretched positioning and optimistic sentiment, with geopolitical tensions and the prospect of persistently high interest rates spurring profit-taking among investors.
As a result, the S&P 500 has dropped more than 5% this month, falling below the 5,000 mark for the first time since February.
Citi sees a buying opportunity in stocks
In the past two weeks, total equity funds have experienced $28 billion in outflows, approximately 0.1% of assets under management (AUM), affecting various regions.
Despite this recent market volatility, year-to-date (YTD) inflows into equities total $134 billion, significantly higher than the $2 billion in outflows recorded for 2023, Citi strategists highlighted in a recent note.
This represents the first time since the onset of the Russia-Ukraine conflict that equity funds have seen five consecutive months of net inflows.
Year-to-date, equity flows have closely mirrored narrow market performance.
The majority of these inflows have been channeled through passive funds, whereas active funds have experienced outflows.
“Tech and Industrials are the only sector funds with inflows YTD. One sign of broadening would be a YTD catch-up of positive flows into small cap funds, almost reversing cumulative outflows since 2022,” Citi noted.
Meanwhile, the Levkovich Index, Citi’s measure of U.S. market sentiment, has recently entered the "Euphoria" territory, indicating heightened investor optimism.
However, bullish positioning, especially in the US, has been easing off gradually and now sits at more neutral levels.
“In the US, the S&P500 and NASDAQ have seen bullish positioning declining even more and profit levels being reduced,” Citi’s team said.
In the global context, strategists note that only the Australian market and European banks currently exhibit extended positioning.
Previously overstretched positions in the Euro Stoxx 50 and DAX have now unwound, while positioning in the FTSE 100 is more net short than it was a month ago.
Looking ahead, the strategists maintain a cautiously optimistic outlook on the global earnings per share (EPS) and anticipate approximately a 5% upside for the MSCI All Country World Index by the end of the year.
“We continue to expect broadening market leadership over the medium term, which should support more cyclical markets and sectors,” Citi wrote.
“Near term, we remain focused on the current earnings season, which could re-focus investor attention on solid underlying fundamentals. We would view the recent pullback as a buying opportunity,” they added.