By Senad Karaahmetovic
While the data suggests clients are selling small cap stocks in recent weeks, Bank of America has reiterated its stance that this part of the market is likely to outperform large caps going forward.
“We continue to prefer small>large amid supportive trends (services>goods, US capex recovery/reshoring) and better pricing in of the risks,” an equity strategist wrote in a client note.
Equity client flows showed that BofA’s clients were buying stocks in all three size segments last week, with large caps leading the pack.
“Clients sold small caps in five of the last seven weeks, with rolling 4-wk avg flows negative since Aug. vs. positive for large caps since July. The spread between small cap outflows vs. large cap inflows as a % of mkt. cap over the last 8 weeks is -1 standard deviation. Prior times over the last decade when the spread was similarly extreme, small caps led large over the next two months (by 60bp on avg),” the strategist added in a note.
BofA’s clients were buying U.S. equities last week when the S&P 500 fell by 4.8%. Private clients were buying shares to mark the biggest inflows since May while institutional and hedge fund clients sold after buying the prior week.
The buying activity was focused on single stocks while ETFs were mostly sold. Inflows were largest in Health Care while Consumer Discretionary and Communication Services also attracted inflows. On the other hand, Tech, Energy, and Materials saw outflows with Energy outflows being the biggest since February.
“Defensive sectors in aggregate have seen inflows the last five weeks vs. outflows from cyclicals in four of the last five weeks (a reversal vs. trends for most of this yr),” the strategist added.
Overall, the strategist concluded that last week’s flows suggest a “lack of true bearish sentiment”.