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Is COVID-19 Rocking Capital Market Foundations?

Jackie Bennion

23 June 2020

A new report by the on the effects of the crisis on global markets and the investment industry, including the massive fiscal and monetary interventions from states, reveals that fund managers are most concerned about asset pricing and are far more conservative in their recovery estimates than industry and political leaders.

Based on the feedback of roughly 13,000 CFA charter members in April, 96 per cent of managers globally were worried about asset mispricing, largely driven by liquidity dislocation and government support distorting pricing.

The recovery picture was another big concern, with 44 per cent globally seeing a medium-term ‘hockey stick’ recovery, suggesting some level of stagnation for two to three years before a clearer picture emerged; while a third thought a slow U-shaped recovery more likely, seen in a moderate pick-up lasting three to five years before clear acceleration was visible.

Most did not share the more upbeat tone coming from banking CEOs and other industry leaders: "The lockdown has had a massive effect on the markets and in terms of the recovery, our members are more cautious on the form it will take compared with others in the financial services industry who have been more bullish," Margaret Franklin, president and CEO of the CFA said.

Franklin said that a clear majority were either taking a ‘wait and see’ approach with their portfolios or had made no changes. The report found that most of the global jitters were coming from investors in Latin America (44 per cent) and South East Asia (38 per cent), and less so from those in Europe or North America.

The impact on asset management
More immediate has been gauging the scale of bankruptcies and how firms will manage automating their services to bring down costs. Consolidation was a theme across all regions for CFA members, with many seeing a divergent trend between emerging and developed economies as markets as a whole ratchet down their globalized approaches.

"The differences in the impact and response form the industry across developed and developing markets, which this survey reveals, will be key as the coronavirus story unfolds in the coming months,” said Olivier Fines, head of advocacy for EMEA at the institute, and the report's author.

Governing through the crisis
Behaving badly in this crisis won't be easy to shake off, and nearly half thought the economic shock would result in more unethical behavior. Most agreed that regulations should not be relaxed to speed a recovery; and companies taking public money should not pay dividends or executive bonuses; but stopped short of suggesting a ban on short selling.

Impact on employment
Job losses have been one of the more shocking human statistics in containing COVID-19, but CFA members say it is too early to tell how this will play out longer term for the sector. The report found that most firms are freezing hiring for now. Equally, a "signficant proportion" in the profession are extremely worried about short-term job security. Half of UK firms reported no change to hiring plans, with just 10 per cent reporting any downsizing. But given that data was collected in April, this sentiment may not hold true in late June.

What about market volatility?
Again, too early to tell. Most members said that they were still analyzing volatility before making any strategic allocations or were not seeing any significant impact yet; but a quarter in the UK said they had already made significant changes to allocations.

Most managers acknowledged that liquidity was down and agreed that central banks were doing a good job of steadying that downward trend. But members were divided on whether aid should continue in the recovery or be stopped soon to allow free markets to take over. Only a minority in the UK thought that markets were heading for a severe liquidity shock, leading to fire sales and dislocation. About half the members globally didn't want regulations relaxing to bolster trading and liquidity, and there was overwhelming support to review ETFs activity over the past few months to look at any deeper impact.

Learned so far
Not surprisingly, managers want regulators to double down on educating investors about exposure to fraud and the industry as a whole to step up vigilence. While most didn't favor any security market holidays, some in the UK argued for a temporary stay for companies reporting changes in their financial circumstances.

Views on whether the crisis has changed much in the active versus passive debate showed around half in the UK seeing the steady shift toward passive investing unlikely to be reversed.

About the survey
The survey was sent to the global membership of CFA Institute between April 14 and 24. 167,312 were invited to participate of which 13,278 provided a valid answer, giving a total response rate of 8 per cent.