A quarter of a trillion dollars is expected to shift from bonds to equities in the coming weeks, part of a move by large investors such as US pensions and sovereign wealth funds that should support equity markets rocked by the Ukraine crisis .
The decline in equity markets since Russia’s invasion of Ukraine late last month will force large institutional investors to replenish their equity portfolios to ensure these positions are consistent with their asset allocation strategies. long-term assets.
The rebalancing, which is expected to take place at the end of the first quarter at the end of this month, will send up to $230 billion shifting from bonds to stocks, according to JPMorgan Chase.
“Large rebalancing flows should support equity markets through the end of this month,” said Nikolaos Panigirtzoglou, strategist at JPMorgan.
The rebalancing comes as funds that target particular allocations, such as 60% equities and 40% bonds, reorganize their holdings ahead of the usual quarter-end reporting requirements.
U.S. defined-benefit pension plans, which collectively manage assets of around $8 trillion, are expected to shift $126 billion into stocks from bonds in March to ensure their portfolios stay on track. to achieve their long-term performance goals.
JPMorgan also estimated that stock markets could see $24 billion in inflows this month from “balanced” U.S. mutual funds that invest in both stocks and bonds.
Japan’s $1.6 billion government pension investment fund, the world’s largest pension scheme, could move $40 billion, while about $22 billion could be moved by the Norwegian oil fund of $1.3 billion, the largest sovereign investor in the world.
Higher oil prices so far this year will also provide Norges Bank Investment Management with additional revenue which should result in additional capital inflows.
The Swiss central bank has increased its equity holdings after accumulating additional foreign exchange reserves following interventions aimed at tempering the strength of the Swiss franc since 2008. JPMorgan estimated that the Swiss National Bank could allocate $15 billion in shares before the end of March, reversing the estimated $12 billion in equity sales made in the last quarter of 2021.
Large investors’ cash holdings have risen sharply in recent weeks, surpassing the level reached in March 2020 at the start of the pandemic, when containment measures suppressed economic activity. The increase in cash holdings so far this year reflects concerns about the implications of the war in Ukraine and the risk that sharp rises in commodity prices could push Europe into an economic recession.
Panigirtzoglou said European stock markets are pricing in a 78% chance of a recession in Europe, while the US stock market is inferring a 50% chance of a US recession. Investors in the US and European bond markets seem more optimistic about the outlook and attributed lower odds to risks of economic recession, although the US Federal Reserve and European Central Bank are expected to raise interest rates this year.
Inigo Fraser-Jenkins, senior analyst at AllianceBernstein, said it was “too easy” to take a negative view of the stock market outlook, given high stock valuations, heightened economic risks from the conflict Russian-Ukrainian crisis and the need for central banks to fight inflation through tighter monetary policies.
“Investors are faced with tough choices. The prospect of lower returns will force a rethink of portfolios. But equities remain a staple portfolio anchor for any investor looking to fight inflation, whether it’s a pension plan, sovereign wealth fund, endowment or family. office,” he added.