"Given how low equity market depth is at the moment, the cumulative impact of this rebalancing flow on equities by the end of June could exceed 10%," J.P. Morgan strategist Nikolaos Panigirtzoglou said in an interview.
The optimistic scenario touted by Mr. Panigirtzoglou, a widely followed expert on Wall Street capital flows, comes as U.S. stocks flirted with a bear market last week as threats to economic growth and Federal Reserve hawkishness spark investor anxiety.
J.P. Morgan strategists have been beating the bullish drum for months, making them outliers in an increasingly bearish market. Morgan Stanley strategist Michael Wilson warned Monday that the main U.S. stock gauge could fall 13% from current levels amid mounting risks to the economic expansion. Participants in an MLIV survey expect a further 10% decline from Friday's closing level.
J.P. Morgan had forecast a boost to global markets of as much as 10% from quarterly rebalancing flows in March — while that proved over-optimistic the MSCI World index nevertheless clocked up an advance of 2.5%, the only month of gains all year.
Pension and sovereign wealth funds that form the backbone of the investing community typically rebalance their market exposures every quarter to get back to their allocations that can resemble 60% stocks and 40% bonds.
Declines in stock market values have now left them short of their targets. To get back to balance, they'll start to move about $45 billion to stocks from bonds by month-end, and then shift another $207 billion by the end of June, according to the U.S. bank.
U.S. defined benefit plans — which manage $7.5 trillion of assets — would need to shift up to $167 billion into equities to meet their long-term targets and bring them back to March levels.
According to J.P. Morgan calculations, Japan's $1.6 trillion Government Pension Investment Fund, the world's largest pension fund, would have to buy $16 billion of equities to get back to its target by the end of the quarter. The $1.3 trillion Norwegian sovereign wealth fund could move $13 billion into the stock market while the Swiss National Bank could buy $11 billion by quarter-end.
Internal limits at pension funds are less strict than sovereign wealth funds and balanced mutual funds so the rebalancing flows may be smaller than calculated.
Spokespeople for SNB and Norges Bank Investment Management — which manages the Norwegian fund — declined to comment. A spokesperson for GPIF didn't immediately respond to an email outside of business hours seeking comment.
The S&P 500 is down more than 18% from its high and slipped into a bear market during Friday's session. The sell-off has sent the index deeper into a seventh weekly decline that would make the longest losing streak since the dot-com bubble burst more than two decades ago.
