[Note: This article was initially published on IndexUniverse.eu] 

The 2009 equity market rebound continues apace. The DJ Stoxx 600 European equity index, which comprises large-, mid- and small-cap companies from 18 European countries, has rallied by nearly a third from its early-March low.

Three months ago, we took a sector-based look at the bear market, reviewing the performance of the 19 DJ Stoxx 600 supersector indices. The review showed that the three "FIRE" sectors—finance (including banks), insurance and real estate—and the basic resources sector had been the worst performers during the 2007-09 bear market.

How do things look a quarter later, and with the mood amongst equity investors dramatically better?

The table below gives the 2008-09 low point, and its date, for each supersector index in the DJ Stoxx family. The fourth column shows the percentage decline from the 2007-08 index peak. Finally, columns five and six show the most recent index level for each supersector, and the percentage increase from the recorded lows. We quote the euro-based return indices in each case (i.e., allowing for the reinvestment of dividends), as these are used by most European equity-sector ETFs as their underlying benchmarks.

From Losers To Leaders

Seventeen of the 19 DJ Stoxx 600 supersector indices saw their lows for the bear market (so far!) in March 2009. The sectors that have rebounded the most during the two-month equity market rally are those that were the worst hit during the bear market.

The sector leaders during the upturn are, in order of the percentage increase from their lows: banks (+97.61%), insurance (+71.33%), and basic resources (+63.95%). These sectors were, respectively, first, third and fourth in terms of the magnitude of their bear market declines, with banks suffering a collective loss of over four-fifths of their market capitalisation.

Conversely, the sectors showing the lowest percentage increase from their lows are those that proved the most defensive during the downturn. Health care (+7.51%), telecommunications (+7.99%) and food & beverage (+15.24%) were, respectively, the first-, third- and second-best performers during the bear market.

A switch from bear to bull market is often marked by a change in sector leadership, with new companies coming to the fore, while the leaders in the previous bull market fall behind. The current rally shows no such change in leadership so far, with the financials and commodity-related stocks that powered the 2003-07 bull market once again in the lead.

According to Anthony Bolton of Fidelity in a recent Bloomberg interview, a bull market has indeed started, and financials should lead the way. Other observers point out that March and April have seen a significant rotation by investors from defensive sectors, such as health care, consumer staples and utilities, into the more economically sensitive areas of the market, which had suffered the most during the downturn.

More sceptical commentators argue that the fact that the bear market losers are leading the current rally is merely a sign of a technical rebound, driven by short-covering. According to David Rosenberg of Bank of America Merrill Lynch, quoted on the Option Armageddon blog, the 50 most heavily-shorted stocks in the US were the ones that outperformed the market most in April.

A timely reminder of the magnitude and duration of typical bear market rallies came from Henry Blodget in a Business Insider article, posted May 3. Blodget notes that the 1929-32 bear market saw a number of sharp rallies, whose average magnitude was 30%, and average duration 70 days. With the DJ Stoxx 600 index up 32% in 56 days from its 9 March low, we're close to the point where—if we're still in a bear market—a typical rally might falter.

Where's Investor Money Heading?

In the table below, we look at the change in DJ STOXX 600 sector ETF assets under management over the year from end-April 2008 to end-April 2009. Figures are taken from the Deutsche Bank ETF Liquidity Trends publication, and the sector ETF assets reflect the combined funds under management of all ETFs tracking the given sector. In the final column, we adjust asset figures for the change in market levels over the period, to give an indication of investor cash flows.

When measured in absolute terms, only three sectors show an increase in ETF assets for the year from end-April 2008 to end-April 2009 - banks, personal and household goods and real estate. The banking sector is the standout in terms of asset flows, with ETFs almost doubling their size over the year, despite a fall of over 50% in the index. When the assets under management figures are adjusted to reflect the impact of equity market declines over the period, 14 out of the 19 sectors show net ETF inflows over the year in review.

The biggest investor inflows were seen by ETFs tracking the DJ STOXX 600 banks index, followed by basic resources ETFs. The technology and telecommunications sectors were the biggest net losers in terms of investor assets. However, according to Manooj Mistry at db x-trackers, his firm has seen significant creations in the long technology sector ETF since the end of March. The other notable recent increase in sector ETF assets at db x-trackers include both long and short (inverse) versions of the DJ Stoxx 600 banks fund.

Taking a longer-term view of fund flows, research from Barclays Global Investors shows that 12-month rolling net asset flows to European sector ETFs have remained positive since mid-2006, despite the equity bear market, even if the rate of inflow has decreased from a peak registered in 2007. Total pan-European sector ETF assets are now around €4 billion, down from a maximum of over €6 billion in late 2007.

Summary

A review of sector-based equity ETF returns shows that the biggest decliners during the bear market have been leading the recent share price rebound. Opinions are divided on the way forward: plenty of bullish calls have been heard over recent weeks, while the more pessimistic point to the size and duration of previous bear market rallies as a sign that the current rebound may be reaching its end. Meanwhile, investor inflows to sector-based ETFs have continued over the last year, with banks the biggest recipient of new funds.