How asset owners are reacting to market turmoil

An oil price war, a pandemic and fears of a global recession pushed US stocks into their biggest decline since 2008. Asset owners are carefully weighing how best to respond.
How asset owners are reacting to market turmoil

Asset owners in the region are assessing investment risks and market developments, following severe market volatility caused by the coronavirus outbreak and news that the world's crude oil supply is set to markedly increase. 

Some are optimistic on the long-term investment outlook, though market observers have warned that it is still too early to tell how things will unfold. Nevertheless, investment experts urge institutional investors to stay calm and mitigate risks through a diversified portfolio.

For a few asset owners, the turmoil offers an opportunity to weigh up in favoured assets. 

"We are trying to take advantage of market movements to increase our position in Reits... [That said], at this stage I do not think it is the right time to adjust our tactical positions," Jang Dong-Hun, chief investment officer of Korea’s W13.9 trillion ($11.7 billion) Public Officials Benefit Association (Poba), told AsianInvestor. 
"Fortunately we have quite a high cash position and that is a kind of natural hedge. We are also going to increase our cash position into some long term investment areas," he added.
Investment risks have to be mitigated through asset allocation. Insurance companies in China are not allowed to trade derivatives or use them for risk-hedging purposes. For large institutional investors, hedging won't be enough to cover assets under management anyway, the chief investment officer of one large insurance company in China told AsianInvestor.

It is important to stick to the long-term outlook and analyse the fundamentals of investment assets, despite short-term volatilities, he noted.

Most asset owners appear to be assessing how to respond as events unfold.

"As the situation evolves, we will continue to monitor the latest developments and their implications on the global economy, and adjust the [$540.5 billion] Exchange Fund’s investments as and when appropriate," a spokeswoman at Hong Kong Monetary Authority told AsianInvestor. She declined to comment specifically on how it is adjusting its asset allocation amid the volatile market.

Many investors in the region had begun coming to terms with the potential risks associated with the coronavirus, but the growing rate of infections in Europe and North America, plus the emergence of an oil price war was not on their radars. These have added to the market volatility, Paul Colwell, head of advisory portfolio group for investments in Asia at Willis Towers Watson, told AsianInvestor. 

Having a well-diversified portfolio is the first line of defence. Unfortunately, many asset owners must rely on equity markets to meet return targets, as they are either constrained by local regulations from owning alternative investments or have not had the resources in-house to implement a sizeable alternative investment portfolio, he added.


US stocks fell more than 7% on Monday (March 9)  its biggest one-day decline since 2011 triggering a temporary trading halt after the collapse of talks between Russia and Saudi Arabia on oil output quotas over the weekend.

Saudi Arabia, a member of the Organization of Petroleum Exporting Countries (Opec), effectively declared a price war in the oil market as it slashed the official selling price of crude oil by $7 to $8 per barrel to Europe and the US and by $4 to $6 per barrel in Asia. More to the point, it said that it might increase exports by up to 800,000 barrels a day into an already over-supplied market.

"The oil market is a short-term disruption. I won't panic at the moment," the insurance CIO said. "If the oil price stays too low for too long it will hurt Russia's foreign reserves. I'm positive that there will be a solution," he said.

But other market observers are more cautious, given that the fallout among giant oil nations is taking place at the same time as the possibility of a coronavirus pandemic grows.

"It is worth highlighting that the collapse of the Opec agreement, and the anticipated increase in supply that it will bring, has been made against the backdrop of stymied global oil demand," said Fiona Boal, head of commodities and real assets at S&P Dow Jones Indices in a note.

"While lower oil prices typically boost consumption, the global coronavirus outbreak is quashing oil demand and amplifying the effect of the anticipated supply surge," she said.

A collapse in oil prices also boosts market uncertainty and there’s a lot of fear in the market already. A sharp slowdown in world growth this year looks likely, possibly even global recession in the first half, wrote Shamik Dhar, chief economist at BNY Mellon Investment Management, in a note.

At the end of last year, the probability of a recession in the US was roughly 25%. This has now increased to around 33% with the onslaught of the virus. And these numbers are likely to rise in the short term, said Daniel Seiler, head of multi-asset at Vontobel Asset Management.

Implied volatility, a measure of uncertainty, as well as long-dated bond yields, have reached levels only seen in periods of prolonged market turmoil, said Michael Strobaek, global chief investment officer at Credit Suisse.

While the sharp rise in volatility suggests that markets are moving toward panic mode, it is still too early to see current market dislocations as a trading opportunity. It is at times like these that diversification across asset classes provides the best hedge, he added.

*Richard Morrow contributed to the story

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