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Want something to moan about now that European stocks have finally hit record highs? Trading volumes might be a good place to look. In the biggest rally for European equities since the aftermath of the financial crisis, the cash value traded on the Stoxx 600 index is down about 13% compared to last year, and figures from the region’s biggest exchanges aren’t encouraging either.
Cash equity volume at the London Stock Exchange is down 19% for the first 11 months of 2019 year-on-year, while turnover on Deutsche Boerse’s Xetra is 15% below 2018 levels. To be fair, last year saw the strongest turnover in a decade, but for the wrong reasons: stocks tumbled in the fourth quarter of 2018.
Big volumes on the downside, light volumes in the rally: this is not a good sign, although not entirely a surprise given the lack of investment inflows we’ve flagged here a few times. Usually a market trading at elevated levels near or above record highs, without the underlying confidence reflected in high trading volume, might be a red flag.
“The healthy market is when it’s rising with large volumes,” says Kepler Cheuvreux Global Head of Execution Services Patricia Shin. When the average investor holding an exchange-traded fund dumps its position without fundamental buyers in place, the market will drop without volume, she says.
It’s giving hedge funds and big banks a hard time. “Low volume and low volatility is killing them,” Shin says, talking about hedge funds. As for big banks, they may struggle to make money out of their brokerage business as a consequence, hence more and more lenders are now investing in wealth management, which provides steadier flows, Shin says.
One reason could lie with a change in the way managers are investing. An increasing number of them turn to more static strategies to gain exposure to stocks, with a minimal churn during market swings, even when they have an active approach. “It feels less and less like stock picking,” Shin says.
The lack of volatility this year may also be another reason, according to Deutsche Bank (DE:DBKGn) analyst Benjamin Goy. “Equity volatility, the main driver of cash equity trading volumes, remained suppressed this year with the exception of short-term volatility spikes, as central bank policies remain accommodative,” Goy says.
Indeed, the gauge that measures the swings of the Euro Stoxx 50 (VStoxx) is trading near historic lows, but more importantly, it hasn’t experienced significant spikes this year.
Broadly speaking, we may not go back to a growing volume trend, because the changes are structural, says Alain Bokobza, Societe Generale’s head of global asset allocation. He sees several factors behind these structural changes, starting with the decreasing number of listed companies worldwide. Buybacks are also playing an important role in the de-equitization process.
And that’s not all. Investors’ habits are changing, Bokobza says, highlighting the growth of passive strategies through ETFs, while asset managers have also switched a significant part of their portfolios to unlisted assets, as they have become more liquid.
