JPMorgan Estimates Up To $316 Billion In Forced Month-End Selling

 

Friday's post-European close ramp notwithstanding, stock markets, and especially growth stocks, had a rude awakening this week as rising rates finally hammered high duration stocks, shown in this chart which we have been posting ever since November to warn readers of who will get hammered first.

For those who hope that the worst is now over, JPM has some bad news.

 

 

In one of his latest Flows and Liquidity reports, JPM quant Nick Panigirtzoglou writes that as we approach quarter-end, the equity rebalancing flow question is resurfacing in client conversations. As we notes, "the equity rally and the bond sell-off during the current quarter is naturally creating a pending rebalancing flow for multi-asset investors away from equities into bonds for pension funds and balanced mutual funds. How much of equity/bond rebalancing flow should we expect into current quarter-end?"

To answer this question, the Greek strategist applies a familiar framework and looks at the four key multi-asset investors that have either fixed allocation targets or tend to exhibit strong mean reversion in their asset allocation. These are balanced mutual funds, such as 60:40 funds, US defined benefit pension plans, Norges Bank, i.e. the Norwegian oil fund, and the Japanese government pension plan, GPIF.

For those curious about the details, below is a more detailed summary of the considerations behind the four key investor classes ahead of month- and quarter-end.

1. Balanced mutual funds including 60:40 fundsa close to $7.5tr AUM universe globally, tend to rebalance over 1-2 months or so. The lesson from last Nov/Dec is that balanced mutual funds exhibit flexibility and they do not necessarily rebalance every single month. During the previous quarter, they appear to have postponed rebalancing for Nov-end or Dec-end and to have waited until January to de-risk/rebalance. JPM believes that funds de-risked in January, as a result of the tumble in balanced MFs equity beta, and since it would have been too soon to rebalance again in February, the quant believes that they have likely postponed any pending rebalancing to March.

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