Is the Coronavirus Rocking the Foundations of Capital Markets?

A new report by CFA Institute, the global association of investment management professionals, analyzes the effects of the current economic crisis caused by the coronavirus pandemic on the global economy, the capital markets, the investment management industry, as well as assessing the responses from fiscal and monetary governmental entities.

“CFA Institute brings the unique ability to survey our global membership -- expert practitioners who work in literally every corner of the globe -- to gauge the impact of the pandemic, which quickly caused the markets to crash in all senses,” said Margaret Franklin, CFA, President and CEO, CFA Institute. “In this report, we detail our members’ latest thinking on the impact which the virus has had on our core constituent base, which is global investment management, looking specifically at the economic situation and the shape of the recovery, market volatility, price formation, the significance of regulatory responses and much more.”

“The lockdown has had a massive effect on the markets and in terms of the recovery, our members are more cautious on the form it will take compared with others in the financial services industry who have been more bullish. When it comes to the effect of volatility on their strategic asset allocation, a clear majority of respondents have reported their firms are either adopting a ‘wait and see’ approach with their portfolios or have made no changes. The differences in the impact and response from the industry across developed and developing markets which this survey reveals will be key as the Coronavirus story unfolds in the coming months,” said Olivier Fines, CFA, Head of Advocacy EMEA, and author of the report. “Among the most concerning indicators is that the current crisis carries with it a significant risk of specific asset mispricing, due to liquidity dislocation and the intervention of authorities potentially influencing price formation. The pressure which the current crisis poses to professionals in terms of their professional conduct is also of concern; 45% of respondents believe that it is likely the current crisis will result in unethical actions in the investment management industry. Of note, a majority thought that regulation of market conduct should not be relaxed in this crisis, which is a positive reflection of the ethical professionalism of the membership.”

The report,Is the Coronavirus Rocking the Foundations of Capital Markets, highlights the following themes and statistics from the survey as follows:

• On asset mispricing: A resounding 96% of respondents believe the crisis could result in specific asset mispricing, specifically related to the current situation, with no regional variations. In equal proportion, respondents indicated that this was driven by two underlying factors: liquidity dislocation (38%), of greatest concern to respondents in Asia, and distortion of natural market pricing due to government intervention (36%), of greatest concern to respondents in North America and Europe. 
• On the shape of a potential economic recovery: 44% of respondents see a medium-term ‘hockey stick’ shaped recovery, which implies some level of stagnation for the next two to three years until signs of recovery are visible, with little evidence of variation among members across the Americas, EMEA, and Asia Pacific regions; 35% opted for a slow U-shaped recovery, which would indicate 3-5 years of moderate pick-up in activity before clearer signs of acceleration. Most respondents sit at the conservative end of the spectrum, in comparison to several industry and banking CEOs, who have so far appeared more optimistic. 
• On market volatility: almost 75% of respondents are either still analyzing volatility before making a decision on strategic asset allocation or are not seeing any significant impact yet. The remaining 25% of respondents have significantly modified their strategic allocations, with portfolios in Latin America (44%) and South East Asia (38%) appearing to have shifted due to volatility jitters more than respondents in Europe and North America. 
• On market liquidity: Varying responses exist per type of asset and region. For investment-grade corporate bonds in developed markets, 76% believe liquidity is down, with central bank intervention steadying the downward trajectory overall. Central bank intervention is perceived to have been more impactful in corporate and sovereign bonds in developed markets than for equities. Only a minority of respondents think that we are facing a severe liquidity shock, which could result in fire sales and dislocation. Liquidity in global developed market equities seems to have suffered less from the market rout, with 31% of respondents believing the level of liquidity has dropped.
• On interventionism of governments and central banks: The majority of respondents indicated that this was a major stabilizing factor, but with differences in regional opinion on whether this should continue. Equally supported (49%) are the views that the current state aid will be insufficient and will need to continue, as well as that this aid should be a short-term measure to allow a deleveraging accompanied by fiscal rigor. 
• On the regulatory response: 50% of respondents believe that conduct regulation should not be relaxed to encourage trading and liquidity (26% thought that it should be relaxed), with 69% of respondents suggesting that regulators should actively seek the appropriate response through consultation with industry. Additionally, respondents hold strong views on what regulators should and should not do:

  o   75% believe that companies that receive emergency support during the crisis should not pay dividends or compensate executives with bonuses

  o   A ban on short-selling should not be considered (83%)

  o   A review of ETFs activity during the crisis should be initiated to determine the nature of their potential systemic impact (84%)

  o   Regulators should focus on investor education about the risk of investor fraud in times of crisis (94%) as well as continued market surveillance (82%)

  o   Regulators should not consider imposing security market holidays (82%) or temporarily permitting companies to delay reporting on changes in their financial conditions (73%).

• On ethics in times of crisis: overall, 45% of members think it is likely that the crisis will result in unethical behavior in the investment management industry, with 30% neutral and 25% disagreeing. Less developed markets generally perceive a higher risk in this regard. 
• The impact of the crisis on asset management, the role of finance and globalization:Equally as important, members are first of all predicting large-scale bankruptcies (39% frequency of responses) and also an acceleration of automation to reduce costs (38%). Further consolidation was also a theme, as well as divergence between emerging and developed markets, and a potential reduction in the globalization of financial markets.
• Whether the crisis is changing anything on the active versus passive debate: 42% respondents believe it is unlikely that the crisis will reverse the steady shift into passive investments.
• On members’ employment situation: while it is too early to predict the longer-term effects on employment, 54% of respondents see no change in their firm’s hiring plans, and 36% report a hiring freeze, with only 9% reporting downsizing.

About the survey

The survey was fielded to the global membership of CFA Institute across all regions and jurisdictions where the organization has representation. The survey was sent on 14 April 2020 and closed on 24 April 2020. A total of 167,312 individuals received an invitation to participate. Of those, 13,278 provided a valid answer, for a total response rate of 8%. The margin of error was +/-0.8%.