Why stock markets may soon see a tidal wave of buying. Plus, the best ETFs for buying U.S. equities
The US$250-billion that JPMorgan Chase & Co. expects will move globally from fixed income to stocks in the coming weeks is a number so big that it may affect markets and force many to re-examine their own portfolios.
The end of March is also the conclusion of the quarter, and the majority of funds with both bond and equity allocations – including pension funds, balanced funds and sovereign wealth funds – will be reviewing asset class weightings to adhere to mandates, manage risk and maximize returns. JPMorgan quantitative strategist Nikolaos Panigirtzoglou believes this process will result in a massive shift in investment assets from bonds to equities.
He begins by noting that 60/40 funds, largely passively managed portfolios that maintain 60 per cent stocks and 40 per cent fixed income allocations, represent about US$3.5-trillion in assets. Because of March’s equity market decline, these portfolios are now below the 60 per cent equity target. The managers will be forced by mandate to buy an estimated $24-billion in stocks with proceeds from selling bonds.
U.S. defined benefit pension funds have about $7-trillion in assets. Mr. Panigirtzoglou notes that these funds rebalance more slowly than 60/40 vehicles but forecasts US$126-billion of selling fixed income and buying equities from these managers.
JPMorgan expects Norges Bank, which manages Norway’s sovereign wealth fund, and Japan’s government pension fund to shift a combined $62-billion between asset classes after the end of March.
My expectations are that this mechanical process of selling bonds to buy equities will be more negative for bond markets than positive for equities. Bond prices have fallen as yields have been on the rise – the U.S. 10-year Treasury yield was 1.3 per cent in early December and is now 2.2 per cent – and returns from fixed income have been broadly poor. The U.S.-traded iShares 20+ Year Treasury Bond ETF, for instance, with its US$17-billion in assets, is already down 10.2 per cent in 2022.
Weak performance by fixed income funds is not expected to end any time soon thanks to high inflation and hawkish central banks. Investors have a long history of bailing on underperforming asset classes and selling pressure on bond funds is likely to rise as a result.
I’m not predicting anything, but there exists a plausible scenario in the next few weeks whereby the re-allocation related selling of fixed income by pension funds and balanced funds serves as a catalyst for individual investors to sell fixed income en masse. This will see a degree of bond market volatility much higher than even current elevated levels.
-- Scott Barlow, Globe and Mail market strategist
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Rob Carrick’s 2022 ETF Buyer’s Guide: Best U.S. equity funds
For help in finding the right path for U.S. market exposure, consult this third instalment of the 2022 Globe and Mail ETF Buyer’s Guide. Ten TSX-listed exchange-traded funds are presented for the benefit of investors who would like to cover off their U.S. market exposure with one core fund. One takeaway to note: the “anything goes” atmosphere of 2021 has given way to a preference for stable, well-established stocks.
Cybersecurity stocks set to benefit from heightened concern over Russia, despite current sell-off
In the wake of Russia’s invasion of Ukraine, it made sense that cybersecurity companies would draw some extra investor attention. And there was a decent bump over the first few days, in apparent recognition of Russia’s penchant for wreaking digital havoc as a facet of its military strategy. But the gains quickly vanished, as the broader tech sector sell-off overwhelmed what many observers see as powerful trends working in favour of the cybersecurity space. Tim Shufelt looks at what may happen next.
What’s the best addiction for investors to bet on? Get ready to be surprised
One of the most striking signs of how recent events have reshuffled investors’ expectations is that the owner of tech giant Facebook is now carrying a lower valuation than a purveyor of old-fashioned cancer sticks. What makes this comparison particularly interesting is that both companies are in the business of dispensing addictive commodities – social media in the case of Meta, nicotine in the case of Philip Morris. Catering to these cravings has historically produced big profits for both Meta and Philip Morris. But which addictive business would you rather own part of right now? Ian McGugan has some thoughts.
An AI-powered ETF is being shut down - what went wrong?
While artificial intelligence may one day supplant human portfolio managers, we are a long way from that right now, as the demise of the MIND ETF demonstrates. Rob Carrick explains.
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While the West’s big investors have ditched Russia in recent weeks, one small group of armchair investors sees a bargain and is shrugging off any ethical qualms.
Demand for sustainable funds wanes as Ukraine war puts focus on oil and gas
Demand for sustainable stock funds waned in February as Russia’s invasion of Ukraine hit investor sentiment and higher gas prices and energy security fears bolstered the appeal of the traditional Oil & Gas sector.
Investors had already adjusted for U.S. Fed’s hikes, but worry about clouds on horizon
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The U.S. yield curve has been flattening: Why you should care
To neutral ... and beyond! U.S. rate outlook rises after Fed liftoff
Personal wealth in the U.S. has grown to absurd levels - and David Rosenberg believes a reckoning is coming
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Thursday’s analyst upgrades and downgrades
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Ask Globe Investor
Question: I have been following John Heinzl’s model Yield Hog Dividend Growth Portfolio for a few years, but only now do I have the money to invest. I am considering some of the stocks in your portfolio such as Enbridge Inc. (ENB), BCE Inc. (BCE), Telus Corp. (T), Fortis Inc. (FTS) and Emera Inc. (EMA). However, they are all trading at or near all-time highs. Should I be waiting for a better entry point to invest in these stocks?
Answer:The problem with “waiting for a better entry point” is that it might never come. If the stocks you’re watching continue to rise, you’ll have to pay more for them, not less. What’s more, while you’re waiting for prices to decline, you’ll miss out on the attractive dividends these companies pay.
The fact that a stock is trading at or near a record high does not, in and of itself, tell you anything about where the price is heading next. Yet many investors tie themselves into knots because their biggest fear is that they will buy right before a pullback and “lose money” on paper.
But would that really be such a big deal? If you have a long investing horizon – which you should if you are considering stocks – a short-term drop in a stock price should matter little to you. Your goal as an investor should be to identify solid companies with growing revenues, earnings and dividends that will reward you over the long run – say five years or more. As the old saying goes, it’s time in the market, not market timing, that builds wealth.
So, instead of trying to pick your entry points perfectly – which nobody can do consistently – I suggest you focus on building a well-diversified portfolio, keeping your costs low and reinvesting your dividends to make the most of compounding. These are things you can control. As an alternative to owning individual stocks, you may wish to consider index exchange-traded funds. ETFs will give you instant diversification and help to limit the regret and anxiety that some investors experience when an individual company they own falls in price.
What’s up in the days ahead
Looking for a haven in today’s volatile markets? Ian McGugan will have some suggestions.
Talking and fighting: World market themes for the week ahead
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Compiled by Globe Investor Staff