Global Stocks and Bonds Shift Directions, Analysts Predict Rebalancing in Favor of Bonds
After several quarters where global stocks and bonds moved in the same direction, the MSCI World Index 990100, +0.34% has seen quarter-to-date returns of 5.4%, while the Bloomberg Global Aggregate Bond Index has seen returns of -1.4%, according to analysts led by Nikolaos Panigirtzoglou in a recent Thursday note.
The analysts believe that rebalancing will favor bonds as balanced mutual funds, sovereign-wealth funds, pension funds, and other money managers make shifts to meet allocation requirements.
Implications for Balanced Mutual Funds, Norway’s Oil Fund, and Japan’s Government Pension Fund
Breaking it down, the analysts said that the relative performance of equities and bonds implies that balanced mutual funds would engage in around $31 billion of equity buying and a similar amount of bond selling by the end of the month.
The analysts estimated that Norway’s $1.3 trillion oil fund could see net equity sales of $18 billion, which could be reduced to just $6 billion if net oil revenues are invested equally across quarters and by their end-2022 asset weights.
Meanwhile, Japan’s $1.5 trillion government pension fund would need to sell around $37 billion of equities and buy an equivalent amount of bonds to rebalance its portfolio allocations, the analysts noted.
U.S. Defined-Benefit Pension Plans and Potential Rebalancing Moves
U.S. defined-benefit pension plans, which have assets under management of around $8.5 trillion, tend to balance more slowly over one to two quarters, according to the analysts.
If they were fully rebalanced at the end of March, given the quarter-to-date performance of equities and bonds, U.S. defined-benefit plans could see net selling of $185 billion in equities and similar net buying of bonds. However, the analysts noted that pension funds are less strict when it comes to rebalancing, meaning the full $185 billion of estimated equity selling is unlikely to materialize in full.