“Given the current shallow equity market depth, the cumulative impact of this rebalancing flow on equities by the end of June could exceed 10%,” JP Morgan strategist Nikolaos Panigirtzoglou said in an interview. .
The optimistic scenario touted by Mr. Panigirtzoglou, a widely followed expert on Wall Street capital flows, comes as US stocks flirted with a bear market last week amid threats to economic growth and the ferocity of the Reserve federal government are causing investor anxiety.
JP Morgan strategists have been beating the bullish drum for months, making them outliers in an increasingly bearish market. Morgan Stanley strategist Michael Wilson warned on Monday that the main U.S. stock market gauge could fall 13% from current levels amid growing risks to economic expansion. Participants in an MLIV survey expect a further decline of 10% from Friday’s closing level.
JP Morgan had forecast global markets to rise by up to 10% on quarterly rebalancing flows in March – while that proved overly optimistic, the MSCI World Index nonetheless recorded a 2.5% advance, the only months of earnings of the whole year.
The pension funds and sovereign wealth funds that form the backbone of the investment community typically rebalance their market exposures quarterly back to their allocations which may look like 60% equities and 40% bonds.
Declines in stock values have now left them below their targets. To regain balance, they will start moving about $45 billion into stocks from bonds by the end of the month, then move another $207 billion by the end of June, according to the U.S. bank.
U.S. defined-benefit plans — which manage $7.5 trillion in assets — would need to shift up to $167 billion into equities to meet their long-term goals and bring them back to March levels.
Japan’s $1.6 trillion government pension fund, the world’s largest pension fund, would need to buy $16 billion worth of stock to get back to its target by JP Morgan, according to JP Morgan calculations. the end of the quarter. Norway’s $1.3 trillion sovereign wealth fund could transfer $13 billion to the stock market while the Swiss National Bank could buy $11 billion by the end of the quarter.
Internal limits for pension funds are less stringent than those for sovereign wealth funds and balanced mutual funds, so rebalancing flows may be lower than calculated.
Spokespersons for the SNB and Norges Bank Investment Management – which manages the Norwegian fund – declined to comment. A GPIF spokesperson did not immediately respond to an out-of-hours email seeking comment.
The S&P 500 is down more than 18% from its high and slipped into a bear market during Friday’s session. The selloff sent the index deeper into a seventh weekly decline that would mark the longest losing streak since the bursting of the dotcom bubble more than two decades ago.