By Naomi Rovnick
LONDON (Reuters) – Major investors are bracing for this summer’s stock market rout to extend into the autumn, fearing a broader sell-off after turbulence sparked by U.S. recession fears and the Bank of Japan’s misguided currency speculators.
The sudden reversal in equity and currency trading, which generated vicious feedback loops of price declines, volatility and hedge fund selling, has eased, with global stocks up nearly 2% since the start of the week.
But asset managers overseeing hundreds of billions of dollars in investments said they were more likely to continue selling stocks than buying them back, as signs of weakness in the U.S. jobs market and global consumer trends lowered the bar for market aftershocks.
The buy-the-dip mentality, where investors typically respond to selloffs by betting on recovery, has been replaced by fear.
“This is not just a major crash in financial markets like the one last week. It’s bigger than that,” said Mahmood Pradhan, a former deputy director of the IMF and head of global macroeconomics at Amundi, Europe’s largest fund manager.
He expects investors, who Bank of America says have already reduced their equity positions and increasingly turned to cash, to remain cautious.
Michael Kelly, head of multi-asset assets at PineBridge Investments, which oversees about $170 billion in client funds, is among those who have reduced his funds’ stock positions and could still step down.
“It’s going to be very, very volatile over the next couple of months,” he said.
A first rate cut in the United States, expected next month, could be too late to save the economy, he added.
Investors’ expectations for global growth have fallen to their lowest level in eight months.
WHO WILL SELL IT NEXT?
A weak US jobs report and a shock BoJ rate hike sent global stock markets into a tailspin as volatility-driven, trend-following hedge funds headed for the exits and anxious investors flocked to government bonds.
The BOJ’s rate hike wiped out billions of dollars of previously profitable trades, where speculators had borrowed cheap yen to buy higher-yielding assets like U.S. technology stocks.
About 70% of those carry trades have now been liquidated, according to JP Morgan estimates. But cash flows from yen-linked positions are hard to measure and Amundi’s Pradhan said the possibility of further liquidation was making investors quite risk-averse.
Gerry Fowler, head of European equity strategy at UBS, said hedge fund sales were likely over, but slower traditional investment managers often take four to six weeks to adjust their portfolios.
These fund managers could be the next to sell, said Marie de Leyssac, multi-asset portfolio manager at Edmond de Rothschild Investment Partners, but they would do so based on economic data.
Although she does not see a sharp slowdown in the United States as likely, she has not bought stocks, preferring instead to use put options, which insure against stock losses by paying out when markets fall.
Pension funds would also sell more equity exposures and…
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