JPMorgan Says Buy-And-Hold Funds Can End Biggest Shock Since ’08
(Bloomberg) -- The biggest volatility crisis since Lehman Brothers is rocking markets, and the return of real-money investors is the only thing that’s going to stop it. Luckily, now is the perfect time for them to step in.
So says JPMorgan Chase & Co. as wild price swings spur a self-reinforcing sell-off across risk assets.
Strategists at the bank reckon there’s a good chance that buy-and-hold managers like pension funds, insurers, sovereign wealth funds and the like are ready to stabilize markets with stock buying in order to rebalance their portfolios away from bonds.
They’ve done so in the past when things got this crazy. And their buying is all the more needed now investors who are wedded to a stable value-at-risk measure -- the level of risk in a portfolio in terms of potential losses -- have been cutting positions en masse.
Meanwhile, the real money’s ratio of stock and bond holdings equals the lows of the 2011 euro debt crisis. It’s fast approaching depths last seen during the global financial crisis, according to the strategists.
“Effectively nine years of previous equity-bond overweights have been unwound in only three weeks,” Nikolaos Panigirtzoglou, a London-based strategist at JPMorgan, wrote in a note. “The current entry level for the VaR-insensitive real money investors to step in is extremely attractive from a historical perspective.”
The heavy sell-off of the past few days, with U.S. stocks posting their worst drop since Black Monday in 1987, has been driven in large part by risk reduction from VaR-sensitive investors than about markets pricing in a deep economic slump, Panigirtzoglou argues.
Though pessimism about the global economic path is certainly swirling too. When stocks sink into a bear market, it signals an over 80% chance of recession hitting the U.S., if history is any guide. Investors are fretting that authorities won’t be able to get a handle on the spreading coronavirus before it makes a meaningful hit to growth.
VaR-sensitive investors include hedge funds, mutual funds, risk parity strategies, banks, dealers and market makers. The spike in volatility risks creating a vicious circle for them. As swings increase, market makers step back from making markets and raise bid-offer spreads. This reduces market depth and lowers liquidity which in turns boosts volatility.
Apart from pension funds, insurers and sovereign wealth funds, other potential buyers are endowments, households and large companies that can do share buybacks, Panigirtzoglou said.
“In our opinion, a major condition for that to happen is already in place,” he said.
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