JPMorgan: A big rotation from bonds to equities on the cards

Rebalancing can fetch $230-billion inflows into world stocks this month

The worst could be over for the equity markets, at least for March. Global investment bank JPMorgan is projecting a $230-billion bonanza for the global equity markets as large institutional investors, mainly balanced mutual fund and pension funds, rotate out of bonds into equities.
 

Though a large portion of these inflows are estimated to go into American stocks, they may spillover over into other markets.

The main thesis of the JPMorgan study is that the sharp fall in the market, so far, this year has turned the risk-reward favourable for equity investments vis-à-vis bonds. As a result, funds that look to juggle their investments between equities and bonds will take money off the table from the bond market and invest in equity, taking advantage of the downturn.
 

“The question of month-end and quarter-end rebalancing flows by multi-asset investors has again been resurfacing in our client conversations given the 11 per cent decline in global and US equities in Q1CY22 to date. Given that almost half the decline happened in March, we expect to see significant flows by both monthly and quarterly rebalancing funds towards the end of this month,” said a note by JPMorgan.
 

“We estimate the potential rebalancing flow for the end of March at around $230 billion out of bonds and into equities from multi-asset investors, such as balanced mutual funds, US-defined benefit pension funds, the Norwegian oil fund, the SNB (Swiss National Bank) and the GPIF (Japan’s Government Pension Investment Fund),” it added.
 

Already most global equities have rebounded sharply off their lows this month. The Indian markets after dropping 7 per cent during the start of the month have gained close to 8 per cent from their March lows. Similarly, the S&P 500 index of the US after dropping close to 7 per cent has recouped most of its losses.
 

The assets under management (AUM) of balanced mutual funds (hybrid category) are pegged at $8 trillion at the global level. “Given the relative performance of equities and bonds since the end of February, we estimate $24 billion of equity buying into March-end (and a similar amount of bond selling) from balanced mutual funds,” said JPMorgan.
 

According to JPMorgan’s calculation, rebalancing at Norges Bank, which has equity holdings of around $1.3 trillion, would result in equity inflows of $22 billion.
 

Similarly, GPIF, the Japanese government pension plan with $1. 6 trillion AUM, may have to buy equities worth $40 billion to go back asset allocation similar to that during the end of last year.
 

Experts said a similar trend could be playing out in the Indian market, as well.
 

“We saw a sharp divergence between the domestic equity market and sovereign bonds during the start of the month. It provided a perfect opportunity to domestic fund managers, who run hybrid schemes, to shift from bonds to equities,” said an investment expert.
 

The yield on the 10-year government bond touched a high of 6.92 per cent on March 9. Since then, yields have cooled off a bit to around 6.78 per cent.