WORKERS CAPITAL

U.S. pension rebalancing could boost bonds,

 international stocks, banks say

David Randall
Thu, September 29, 2022 


U.S. currency is seen in this picture illustration

NEW YORK (Reuters) - U.S. fixed income and international equities could benefit from quarter-end rebalancing as pension funds square their books after a brutal three months for most asset classes, according to estimates from several Wall Street banks.

Overall, Credit Suisse expects pension funds to buy $30 billion worth of developed market equities and another $15 billion in emerging markets while trimming U.S. large-cap consumer discretionary stocks.

"September has been rough on most asset classes, but on a relative basis, the US has fared better than its international peers," analysts at the firm wrote in a Thursday report.

Wells Fargo, meanwhile, expects pensions to move $10 billion into U.S. fixed income as the group's mean funded ratio - a projection of the gap between a fund's assets and its future liabilities - rises to 107%, near its peak for the year.

Wall Street pays close attention to quarter-end moves by pension funds given their potential outsized market influence. Overall, U.S. state and local pension funds have $5.12 trillion in assets under management, according to data from the Federal Reserve, and often rebalance each quarter to maintain consistent asset allocations.

This year's market swings have presented a challenge to asset managers looking to square their portfolios against a benchmark or return to their long-maintained allocation of stocks versus bonds. The S&P 500 is down 4.6% in the third quarter and has lost 24.2% year to date, while the U.S. bond market - as measured by the $80.3 billion Vanguard Total Bond Market Index fund - is down 3% over the quarter and 14% for the year.

The twin declines in U.S. stocks and bonds this quarter will dampen the overall market effect of investor rebalancing compared to prior periods given that allocations are likely stable, said Marko Kolanovic, chief global market strategist at JPMorgan, in an email to Reuters.

"Stocks are underperforming bonds and other assets - e.g. alternatives - so there could be a bounce 1-2% in stocks given the current low liquidity environment," he said.

(Reporting by David Randall; Editing by Kirsten Donovan)

Pension Rebalancing Threatens to Spur $26

Billion Equity Selloff

Vildana Hajric and Denitsa Tsekova
Thu, September 29, 2022



(Bloomberg) -- US stock investors looking for anything that could halt the rout might not be able to count on a source of support that’s buoyed markets in the past: portfolio rebalancing.

Every quarter- and month-end, pension funds and other institutional investors check their market exposures to make sure they meet strict allocation limits between equities and bonds, as well as between domestic and international stocks. Even amid a global rout, US equities still outperformed many other asset classes, leaving portfolio managers needing to cut their exposure.

When September wraps up, pension funds could be done selling roughly $26 billion in equities thanks to that relative outperformance, according to a Credit Suisse Group AG model.

That’s bad news for anyone who’d hoped buying from that past source of support could act as a lift this time around too. In the last two quarters, the rebalancing by the world’s biggest money managers revived equities by bringing $250 billion into stocks in June and $230 billion in March, according to estimates by JPMorgan Chase & Co.

The S&P 500 lost as much as 2.7% on Thursday as market sentiment soured amid concerns about inflation and the global economy. While the index has slumped 3.7% in the third quarter, global equities have fared even worse, dropping 5.6% with emerging-market stocks falling roughly 12%.

That could give international stocks a boost as Credit Suisse expects buyers to snap up about $46 billion in non-US equities, with $16 billion of that tied to emerging markets. The bank warns the timing of trades could vary dramatically on market sentiment and regularly scheduled cash flows, among other pressures.

Don’t expect the historically stabilizing force of the target-date funds (TDFs) to lead to the usual “miraculous quarter-end stock market rallies,” said Vincent Deluard, a macro strategist at StoneX Financial Inc.

“Equities have outperformed bonds this quarter so the TDF whale should not save the stock market this week,” he wrote

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