Defensives Still Rule Flows As February Déjà Vu Rises And Investors Panic Sell

The S&P 500 slipped 2.4% last week, marking the biggest one-week decline since the early part of February. On one hand, the pullback could just be because it’s September, as history shows that September is usually not a great month for U.S. equities. However, recalling February just brings back bad memories for many investors as the month was marked with unease and marred by great speculations about impending recession and investors flocking to defensives.

Institutional investors still big sellers of U.S. stocks

Bank of America Merrill Lynch Equity and Quant Strategists Jill Carey Hall and Savita Subramanian said in their September 13 “Equity Client Flow Trends” report that defensives remained the focus of their clients. Their firm’s clients were net sellers of U.S. equities to the tune of $1.4 billion, which they said was the biggest sale in six weeks. In fact, BAML clients have been unloading stocks for the last ten weeks, they add.

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Institutional clients led the way last week and also the week before. Private clients were also net sellers last week, which is no surprise because they have also been net sellers for most weeks this year. Hedge funds were net sellers last week too, but only by a small amount, and it was their second week of selling stocks.

Defensives still favored, Cyclicals shunned

The BAML team said their firm’s clients continued buying defensive sectors and unloading cyclical sectors last week, with only two exceptions. Technology was the biggest exception, as it actually recorded the biggest inflows last week, they reported, and Consumer Staples, a key defensive sector, recorded net sales last week.


All three client types sold cyclicals and bought defensives last week, and in fact, flows among BAML’s clients have been tilted toward defensives since the early part of May.

Hall and Subramanian added that there are signs that active mutual funds have actually been buying cyclicals, but they believe some of the divergence could be explained by the fact that their analysis excludes income funds. They add that income funds make up almost half of actively managed money and thus are included in the institutional client group in their other research.

Big inflows to Real Estate, Tech

Real Estate was just broken out as the eleventh sector in the Global Industry Classification Standard this month, recorded the second-biggest inflows of all the sectors last week among BAML clients. Institutional clients led the way in buying stocks in the sector. Hall and Subramanian expect this trend of inflows into the Real Estate sector to continue on the back of greater awareness due to the breakout and active funds reducing their underweight positioning.

The strategists report that inflows to Tech stocks were at the highest level in a year as corporates, hedge funds and institutional investors all buying in the sector.

Exiting ETFs, Discretionary

The BAML team also report that ETFs recorded higher net sales than single stocks in any sector last week. Institutional and hedge funds both led the way in sales. ETF outflows were also at the highest level since early February following net buying in most weeks since May.

They also report that Consumer Discretionary stocks are still the holder of the longest selling streak at 11 weeks in a row. This is particularly interesting because it is the longest selling streak for the sector since the firm started keeping data. The BAML team believes the outflows from the sector will continue as it remains the most crowded sector among mutual funds. They’re also very cautious on Discretionary for a number of reasons.