Tariff concerns drive U.S. selloff, Europe still at risk

Published 01/04/2025, 08:24
© Reuters.

Investing.com -- U.S. equities came under pressure as hedge funds and commodity trading advisors (CTAs) aggressively cut exposure ahead of looming tariff announcements, while European markets, despite recent inflows, may not be insulated from broader risk-off sentiment.

“March saw widespread reduction in equity positioning from key investor categories,” Barclays (LON:BARC) analysts said, with systematic and leveraged funds sharply reducing U.S. equity exposure.

CTAs, in particular, are now outright short, and risk parity funds are holding their lowest equity allocations in over a year, having rotated into Treasuries.

But despite this tactical de-risking, Barclays notes that overall positioning is still far from recessionary levels.

Households keep a record 65% of their financial assets in equities, and mutual funds’ allocations are well above past recession lows.

“While fast-money selling may be largely done in the U.S., real money (mutual funds & retail) remain almost all-in,” Barclays strategists led by Emmanuel Cau said.

“Amid all the Trump noise, equity flows resilience so far is backed by resilient earnings. But if earnings fundamentals turn, flows will likely follow,” they added.

Equity risk appears to have shifted to Europe, where hedge fund net exposure is up to the 70th percentile. EU equities have seen $24 billion in inflows year-to-date, the highest since 2017.

However, strategists warn that “European tactical longs look vulnerable if the growth scare worsens.” Most of the recent inflows, particularly into Germany, have come from domestic investors, with limited repatriation from U.S. investors, leaving room for further adjustment.

With respect to sector allocations, data reflects a tilt toward “tariffs-light” positioning, but portfolios remain exposed to growth risks.

Tech has underperformed, but long-only and hedge funds continue to hold meaningful stakes.

Banks and Defense are consensus longs across portfolios, but the positioning in the former remains high and the sector “looks vulnerable if recession worries spike.”

Barclays sees Insurance and Defensive sectors such as Telcos and Real Estate as more attractive tactical hedges.

“Energy is also under-owned, and could work as a tail risk hedge,” the bank added.

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