Stock market rally may have room to run

Rallies often fade out when everyone’s already invested, but that’s not the case today. Barclays data shows hedge funds covering their short bets has been a major driver of the rally. This is especially obvious in Europe, where short interest has halved.

Macro hedge funds have turned “outright long” equities and their exposure is close to 12-month highs, but it remains below historical norms. Risk parity funds – rule-based strategies combining stocks, bonds and other assets – have also upped their equity exposure, but it remains below average.

Unlike hedge funds, mutual funds have dumped stocks in recent months and are long cash. Retail investors, too, are selling.

The only region seeing especially strong demand in 2023 is emerging markets. In contrast, while it might seem European sentiment is exuberant – Europe’s Stoxx 600 is up 20 per cent from its lows – positioning isn’t actually optimistic. After 48 consecutive weeks of outflows, European stocks have seen a resumption of “modest” inflows. There has been a pickup in US investors buying European stocks, but there is, says Barclays, “a long way to go for the massive flows gap between US and Europe to close”, with continued rotation from US to European stocks likely in coming months.