Risk to stocks in Q3: Equities could lose $200 billion as wealth funds re-balance portfolios - JPMorgan

New York (Sept 17)  Up to $200 billion could flow out of equities in the third quarter as wealth funds re-balance their portfolios, according to JPMorgan Chase & Co.

This kind of selloff could represent the most negative setback since the COVID-19 pandemic first hit the stock market back in March, JPMorgan strategists led by Nikolaos Panigirtzoglou wrote in a note this week.

“This negative re-balancing flow becomes even more problematic given this month’s sharp decline in equity market depth,” the strategists said.

The figure includes pension and sovereign wealth funds — the U.S. defined-benefit pension portfolios, Norway’s oil fund, and Japan’s Government Pension Investment Fund.

Re-balancing of portfolios is nothing unusual, but after global stocks surge that beat returns from fixed income, portfolio re-adjustments will be especially required to keep preferred target asset allocations, the strategists explained.

This could be a major risks facing the equity market during this quarter. Other risks include uncertain economic recovery, stretched valuations on some areas, volatility surrounding the U.S. election in November, and dependence on the Federal Reserve.

Despite the warning, JPMorgan advised to view a potential selloff in stocks as a buying opportunity.

“For the medium to long term, we still see plenty of upside given still low overall equity positioning,” they said. “A retreat in equity and risk markets over the coming weeks would likely represent a buying opportunity.”

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