A quarter-trillion dollars is likely to flow from bonds to equities in coming weeks, in a shift by big investors such as US pension plans and sovereign wealth funds that is expected to support stock markets shaken up by the Ukraine crisis.
Declines for stock markets since Russia invaded Ukraine late last month will require large institutional investors to rebuild equity holdings in their portfolios to ensure these positions are consistent with their long-term asset allocation strategies.
The rebalancing, which is expected to take place as the first quarter draws to a close at the end of this month, will send up to $230bn shifting from bonds to stocks, according to JPMorgan Chase.
“Large rebalancing flows should support equity markets into the end of this month,” said Nikolaos Panigirtzoglou, a strategist at JPMorgan.
The rebalancing comes as funds that target particular allocations, such as 60 per cent stocks and 40 per cent bonds, revamp their holdings before typical end of quarter reporting requirements.
US defined benefit pensions plans, which collectively manage assets of around $8tn, would need to shift $126bn into stocks from bonds during March to ensure that their portfolios remained on track to achieve their long-term return targets.
JPMorgan also estimated that stock markets could see inflows of $24bn this month from “balanced” US mutual funds that invest in both equities and bonds.
Japan’s $1.6tn Government Pension Investment Fund, the world’s largest retirement plan, could shift $40bn, while around $22bn could be moved by Norway’s $1.3tn oil fund, the world’s largest sovereign wealth investor.
The rise in oil prices so far this year will also provide Norges Bank Investment Management with extra revenues that should translate into additional equity inflows.
Switzerland’s central bank has been adding to its holdings of equities after accumulating additional foreign currency reserves as a result of interventions to temper the strength of the Swiss franc since 2008. JPMorgan estimated that the Swiss National Bank could allocate $15bn into equities before the end of March, reversing the $12bn in estimated stock sales completed in the final quarter of 2021.
Cash holdings by large investors have increased sharply in recent weeks, rising above the level reached in March 2020 during the early stages of the pandemic when lockdown measures were suppressing 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 drag Europe into an economic recession.
Panigirtzoglou said European equity markets were pricing in a 78 per cent probability of a recession in Europe, while the US stock market was inferring a 50 per cent probability of a US recession. Investors in both US and European bond markets appear to be more optimistic about the outlook and have assigned lower probabilities to the risks of economic recession even though the US Federal Reserve and European Central Bank are expected to raise interest rates this year.
Inigo Fraser-Jenkins, a senior analyst at AllianceBernstein, said it was “all too easy” to take a negative view on the outlook for stock markets, given high valuations for equities, the heightened economic risks arising from the Russia-Ukraine conflict and the need for central banks to address inflation via tighter monetary policies.
“Investors do face sharp choices. The prospect of lower returns ahead will force a rethinking of portfolios. But equities remain a core portfolio anchor for any investor seeking to beat inflation, whether that is a pension scheme, sovereign wealth fund, endowment or a family office,” he added.
