Hedge Funds Selling Industrials at a Record Pace, Goldman Says

(Bloomberg) -- Hedge funds are rapidly unwinding their bets in industrials stocks, and rotating into the corners of the market exposed to commodities, such as energy and materials, amid growing geopolitical risks and concerns about economic slowdowns in the US and China.

Industrials was the most net-sold US sector last week, according to Goldman Sachs Group Inc.’s prime brokerage desk report. More strikingly, the risk unwinds in the group in total dollar terms since July 11 were the largest on record over a two-week period, the report said, noting that it points to “capitulatory behavior” in the space, Vincent Lin wrote in the note to clients.

Discerning a clear force behind the selling is difficult given the many different kinds of companies that make up the industrials sector, market observers said. However, some cited the approaching US presidential election as heightening the risk of policy changes, especially when it comes to trade and tariffs, a source of sensitivity for the many large companies in this sector that have global businesses. Of particular concern is Donald Trump’s call for steeper levies on Chinese-made goods, and the risk of retaliatory actions from China.

“Some of this is profit taking, ahead of an uncertain election campaign,” said Jonathan Caplis, chief executive officer of hedge fund research firm PivotalPath. “Investors are concerned that a potential Trump administration will provide inflationary pressures and longer-term rate implications around that.”

Industrials earnings for the second quarter have been mixed so far. American Airlines Group Inc. and United Parcel Service Inc. trimmed earnings forecasts for the year, sending worrisome signals about weakening demand. On the other hand, General Electric Co. reported strong numbers on the back of robust demand for engines and maintenance services. 

Hedge funds have been selling industrials since May and the sector was among the most notionally net-sold US sectors in the second quarter. 

While a gauge tracking large industrials stocks — the S&P 500 Industrials Index — has underperformed both the benchmark S&P 500 and the tech-heavy Nasdaq 100 this year, it’s far outpaced both broader ones over the past month. The S&P industrials index is up about 3.7% compared to S&P’s roughly 0.5% advance and the Nasdaq 100’s drop of around 2.4%. The Vanguard Industrials ETF, which saw net outflow of assets for two straight months in May and June, is poised to see an inflow for July.  

“The industrials sector is really a hodgepodge now, with so many different names in different sub groups,” said Nicholas Colas, co-founder at DataTrek Research. “It is tough to call out what macro forces might be driving hedge fund sentiment aside from big picture observations like the election.”

Investors in the space are waiting for construction and mining equipment giant Caterpillar Inc.’s results next week, given it’s seen as a bellwether for both the global industrial economy, as well as trade relations between India and China.

Meanwhile, hedge funds continued to rotate into commodity-sensitive stocks, with energy and materials the most net bought US sectors both last week and in the past four weeks, Goldman’s Lin wrote in the note. Chemicals, oil, gas and consumable fuels, and energy equipment and services were among the most net bought subsectors on the week.

“I think there is just more rotation underneath, but do not see this as broad-based industrial selling,” Adam Parker, founder of Trivariate Research, said in an interview.   

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