Asset managers are preparing to unload $100 billion in stocks to rebalance.. What does that mean?

The world’s largest money managers are set to offload up to $100 billion in stocks in the last few weeks of 2022, adding to a sell-off that has multiplied since Fed Chairman Jerome Powell’s clear message that policymakers will push hard. To reach the inflation target of 2%, which increases the risk of job cuts and a recession.

Despite last week’s losses, equities posted a net gain over the last quarter, driving up their value relative to other asset classes and forcing sell-offs from strict asset managers to rebalance their portfolios. The bonds are expected to be a potential beneficiary of the sales of sovereign wealth funds, pension funds and balanced mutual funds looking to overweight fixed income instruments in their portfolios, according to JPMorgan and StoneX Financial Inc.

JPMorgan has estimated that by the end of December, sovereign wealth funds will sell nearly $29 billion worth of stocks, while US defined pension plans need to convert up to $70 billion from stocks to bonds to meet their long-term goals and return them. to September levels, according to Bloomberg, which was reviewed by Al Arabiya.net.

Pension and sovereign wealth funds that make up the backbone of the investment community typically rebalance their market exposure every 3 months to achieve a mix of 60% stocks and 40% bonds.

For his part, said the macro strategist at “StoneX”, Vincent Delward: “The recent correction in the stock market and the rise in bonds is consistent with the hypothesis of rebalancing.” Investors had to sell stocks and buy bonds to get back to the target. It is logical that this will continue until the end of the year.

Rebalancing portfolios away from equities would also lead to a combined compulsory sale of up to $30 billion by quantitative portfolios that track indexes, especially after a slide that sent the S&P 500 down nearly 6% from its November high.

The final blow came on Wednesday when Fed Chairman Jerome Powell warned that interest rates would remain high to tame inflation at the end of the Fed’s last meeting of 2022, dashing hopes that the central bank was preparing to scale back its aggressive tightening campaign. Instead, policy makers signaled that they would continue to climb to a peak beyond what the market had expected.

According to JPMorgan’s calculations, Japan’s GPIF, the world’s largest pension fund at $1.6tn, would have to sell $17bn worth of stock to return to its target asset allocation. The $1.3 trillion Norwegian Wealth Fund could also convert $12 billion from stocks into bonds.

The expected sales are a reversal of the trend in the first and second quarters as large funds were forced to buy stocks and fueled a strong but short-lived rally. The last time these funds had to offload inventories to rebalance was in the fourth quarter of 2021, according to JPMorgan strategist Nikolaos Panigirtzoglou.