Anita Raghavan,
UBS says hedge funds are making a big bet on the economic rebound, but pitfalls lurk.
LONDON -- If you believe in the old adage "follow the money," then it's time to be snapping up the shares of companies that are sensitive to the economy.
That's the insight in a new report from Swiss investment bank UBS which, using proprietary data from its prime brokerage department, found that net buying of cyclical stocks is back to the highs of May 2009 and is significantly above its long-term average. In particular, metals and mining and capital goods stocks have seen "extreme net buying," UBS says. Wall Street prime brokerage departments provide a variety of services, including lending capital to hedge funds to buy stocks, and have a keen insight into their activities.
"The hedge funds seem to be taking a greater bet on the cyclical economy," says Karen Olney, a London-based co-author of the UBS report. "Hedge funds tend to be faster movers, and over the last three months they have been picking up more industrials and therefore appear to be more comfortable with the direction of the economy."
Hedge fund net buying is at the highest level since October 2007, UBS said in its report. However, in aggregate, when the activity of hedge funds and long-only funds are considered together, investors have turned modest sellers and long-only selling has outweighed hedge fund buying.
UBS in its report also found that investors have switched from heavy net selling of banks shares to modest net buying, and in the chemical industry investors have just turned net sellers.
Of course, not all cyclical stocks have been spared selling pressure from hedge funds and other investors. One of the interesting features of the UBS report is its look at stock-lending data, a useful indicator of which stocks are out of favor. When investors go short or are bearish on a company, they borrow shares to sell with the intent to return the shares after buying them back at a cheaper price. A number of stocks from cyclical companies topped the list of stocks that were heavily lent in early April.
As of April 7, based on estimates from UBS's stock loan desk, the top Continental European companies with stocks on loan were Temenos, with 19.1% of its market capitalization on loan, Infineon Technologies ( IFX - news - people ), with 13.7% of its outstanding stock on loan, Valeo, with 10.8% of its market cap on loan, Air France-KLM ( AFLYY - news - people ), with 8.9% of its available stock on loan and Peugeot ( PEUGY.PK - news - people ) with 8.1% on loan.
In the United Kingdom, as of March 30, the top stocks on loan included British Airways ( BAIRY - news - people ), Vedanta ( VED - news - people ), London Stock Exchange ( LSE - news - people ) and Inmarsat. Stock lending in the London Stock Exchange overall has actually eased over the past month, suggesting that investor appetite for betting against the market in general is ebbing.
