Why stock markets may soon experience a tidal wave of buying. Plus, the best ETFs to buy US stocks

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The US$250 billion that JPMorgan Chase & Co. predicts will shift globally from fixed income to equities in the coming weeks is such a large number that it could affect markets and force many people to re-examine their own portfolios.

The end of March also marks the end of the quarter, and the majority of funds with both bonds and equities – including pension funds, balanced funds and sovereign wealth funds – will re-examine class weightings. of assets to meet mandates, manage risk and maximize Return. JPMorgan’s quantitative strategist, Nikolaos Panigirtzoglou, believes this process will lead to a massive shift of investment assets from bonds to equities.

He begins by noting that 60/40 funds, largely passively managed portfolios that keep 60% equities and 40% fixed income, represent about US$3.5 trillion in assets. Due to the stock market decline in March, these portfolios are now below the 60% equity target. Managers will be compelled by mandate to buy about $24 billion worth of stocks with the proceeds from the bond sale.

US defined benefit pension funds have approximately $7 trillion in assets. Panigirtzoglou notes that these funds rebalance more slowly than 60/40 vehicles, but forecasts US$126 billion in fixed income sales and equity purchases from these managers.

JPMorgan expects Norges Bank, which manages Norway’s sovereign wealth fund, and the Japanese government’s pension fund to shift $62 billion between asset classes after the end of March.

I expect this mechanical process of selling bonds to buy stocks to be more negative for bond markets than positive for stocks. Bond prices fell as yields rose – the 10-year US Treasury yield was 1.3% in early December and is now 2.2% – and fixed income yields have been lackluster overall . For example, the US-traded iShares 20+ Year Treasury Bond ETF, with its $17 billion in assets, is already down 10.2% in 2022.

The weak performance of fixed income funds is not likely to end anytime soon thanks to high inflation and hawkish central banks. Investors have a long history of bailing on underperforming asset classes and the selling pressure on bond funds is likely to increase accordingly.

I’m not predicting anything, but there is a plausible scenario in the coming weeks in which the tied selling of reallocation of fixed income securities by pension funds and balanced funds serves as a catalyst for individual investors to sell securities in droves on fixed income. This will result in a degree of bond market volatility well above the current high levels.

— Scott Barlow, Globe and Mail Market Strategist

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The summary

Rob Carrick’s 2022 ETF Buyer’s Guide: Best US Equity Funds

To help you find the right path to exposure to the U.S. market, check out this third installment of The Globe and Mail 2022 ETF Buyer’s Guide. Ten exchange-traded funds listed on the TSX are featured for the benefit of investors who want to hedge their exposure to the US market with a core fund. One takeaway: The “anything goes” atmosphere of 2021 has given way to a preference for stable, well-established stocks.

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Also see:

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Globe Advisor

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Ask Globe Investor

Question: I followed the John Heinzl Yield Hog Dividend Growth Portfolio model for a few years, but only now do I have the money to invest. I consider some of the stocks in your portfolio such as Enbridge Inc. (ENB), BCE Inc. (BCE), Telus Corp. (T), Fortis Inc. (FTS) and Emera Inc. (EMA). However, they are all trading at or near all-time highs. Should I wait for a better entry point to invest in these stocks?

To respond: The problem with “waiting for a better entry point” is that it might never come. If the stocks you’re watching continue to rise, you’ll pay more for them, not less. Plus, by waiting for prices to drop, you’ll be missing out on the attractive dividends these companies pay out.

Whether a stock is trading at or near an all-time high doesn’t in itself tell you anything about where the price will go next. Yet many investors tie themselves in knots because their biggest fear is buying right before a pullback and “losing money” on paper.

But would it really be so serious? If you have a long-term investment horizon – which is best if you’re considering stocks – a short-term drop in a stock’s price shouldn’t matter to you. Your goal as an investor should be to identify strong companies that are growing in revenue, earnings and dividends and that will pay you back over the long term, say five years or more. As the old saying goes, it is time in the market, not market timing, that creates wealth.

So instead of trying to pick your entry points perfectly – which no one can consistently do – I suggest you focus on building a well-diversified portfolio, keeping your costs low and reinvesting your dividends to get the most out of capitalization. These are things you can control. Instead of owning individual stocks, you can consider exchange-traded index funds. ETFs will give you instant diversification and help limit the regret and anxiety that some investors feel when the price of an individual company they own goes down.

–John Heinzl

What’s up in the coming days

Looking for refuge in today’s volatile markets? Ian McGugan will have some suggestions.

Talk and Fight: Global Market Themes for the Week Ahead

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Compiled by Globe Investor staff

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