The spread of COVID-19 has led to a negative outlook for money managers by ratings agency Moody's.
The outlook was downgraded from stable.
Revenue and cash flow for money managers, which are highly correlated to financial market moves, will come under strain by the economic impacts of the coronavirus, the firm said in a report Monday.
New inflows into the industry are also likely to be limited by rising economic uncertainty caused by the virus.
"Given the precipitous drop of assets under management during the past four weeks, asset managers' profitability and liquidity will be impaired," the report said. Figures were not immediately available.
The agency's base case scenario assumes that economic and financial market conditions will weaken in the period ending June 30 but show some recovery in the second half of the year. The agency also noted central bank and policymaker moves to mitigate a recession and ease liquidity stress.
However, money managers "will be forced to rapidly adjust their cost structure and conserve liquidity." Should public health measures fail to restrain the pandemic, "a deeper more prolonged economic slowdown in the U.S. and Europe will result, and the credit negative implications for asset managers will intensify," the report said.
Second-quarter revenue figures are expected to show the impact of market volatility in March. Revenue from performance fees is also expected to fall sharply this year, Moody's said. Compensation, which Moody's said is the biggest cost to money managers, will be cut and "softening the impact on cash flow from revenue declines, but other spending, on efficiency initiatives and markets, will be reduced to preserve cash flow in the face of increasing economic uncertainty.
The coronavirus will also drive a shift toward safer, lower fee investment strategies — weighing further on revenues. However, an improvement in market conditions in the second half of the year would increase risk appetite and industry inflows into higher-fee, riskier strategies. Assets could also shift to active strategies if managers are able to prove their value throughout the volatile period.
"Our previous stable outlook was premised on manageable debt burdens, investor appetite for higher risk and higher fee products along with continued, but only slowing global economic growth. These assumptions are no longer tenable in light of the coronavirus pandemic," the report said.
