As we are heading towards the end of the quarter, the chances are that stock markets will stabilise somewhat as many pension and other multi-asset funds will need to buy equities to get back to target weights.
There is anecdotal evidence that balanced funds are as much as 10 per cent underweight in equities, due to the volatility caused by the coronavirus crisis. With the end of March in sight, many will now have to rebalance their portfolios.
“Financial markets have been spooked, because people suddenly realised that this wasn’t just a localised problem in Hubei, China. It affects them personally and there is a fear of dying, which has panicked a lot of investors,” Jonathan Eriksen, Managing Director at EriksensGlobal Actuaries & Investment Strategists, says in an interview with [i3] Insights.
“The stock markets have been nose-diving and have not bottomed yet. You’ve also had a lot of ETFs being sold off, and they sell every stock, which is why the markets have gone down so far.
“But we are expecting markets to stablise this week, because it is the end of a quarter and people are rebalancing their positions, having to rationalise their short-selling positions and so you are getting a number of balanced funds and multi-asset funds buying shares,” he says.
Eriksen is an independent asset consultant, advising superannuation funds and other investment clients in the Asia-Pacific region on a range of issues, including asset allocation, governance, investment manager selection and performance monitoring.
Many of his clients have been impacted by the fear in the markets.
You want to try and preserve your capital by not changing risk profiles, not selling shares or high yield bonds, unless you have to. You want to trade out using your cash and most defensive assets as well as any incoming cash flow that you might have
“Obviously, liquidity is a key concern for them, but the problem we have is that a lot of people who are in multi-asset funds and superannuation funds in particular, have been switching from growth or balanced down to conservative or cash. That is totally the wrong thing to do, because that crystalises the losses.
“But the question that we are getting is: ‘Where do we get our liquidity from at the moment?’ Obviously you should take it out of cash if you’ve got it, but with all the rebalancing that is going on, people are taking it out of any asset class that has some liquidity.
“With the bond market freezing up, in some cases you actually have to sell shares. And so there is still a way to go down before we hit the bottom, we think, although there won’t be a very clear bottom, as different markets will recover at different times, depending how the underlying economy of those countries are recovering,” he says.
The recent volatility in the markets has had many drivers and it has caused prices to be divorced from their fundamentals. Panic selling, forced risk reduction, margin calls, redemptions, deleveraging, member switching, an unprecedented US$2 trillion stimulus in the US and portfolio rebalancing all have their push and pull effects on the equity markets, making it hard to identify a trend.
One superannuation fund chief investment officer put it this way:
“Anyone who tells you they KNOW why markets went up or down on a particular day is either lying, a shill or deluded.”
In this environment, you want to be cautious about any changes you make, Eriksen says.
“You want to try and preserve your capital by not changing risk profiles, not selling shares or high yield bonds, unless you have to,” he says. “You want to trade out using your cash and most defensive assets as well as any incoming cash flow that you might have.”
People that are still working, still got their SG (superannuation guarantee) contributions paid and same here in New Zealand, we’ve still got our Kiwi Safer money being paid so there is some liquidity in the market
Australian superannuation funds still have relatively decent cash flows because of the mandatory superannuation regime and this could help the local stock market in the long run, he says.
“People that are still working, still got their SG (superannuation guarantee) contributions paid and same here in New Zealand, we’ve still got our Kiwi Safer money being paid so there is some liquidity in the market,” he says.
“In that sense, we think the Australian and New Zealand stock markets are well positioned to come out of this once we go through this lockdown phase, which is absolutely necessary.
“We think the COVID-19 crisis is going to last for about 18 months, but the market is probably going to recover sooner than that. Markets could start recovering as soon as July/August or maybe October/ November because of the massive global monetary and fiscal cash injections.
“But it is one day at a time. Today the key is to protect your health and that of your family,” he says.
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.