A CFA Institute report focuses on the top woes of investment firms caught in an economic slump.
Grygo is chief content officer for FTF.
It is nearly impossible to draw useful conclusions about the effects of the economic crisis that we find ourselves in as a result of the lockdown caused by the COVID-19 pandemic.
But, a month ago, the CFA Institute released the results of a major survey of its membership that points to big concerns over mispricing, and a lot of support for a ban on firms paying dividends or high executive bonuses if they got emergency support from governments.
For our purposes, mispricing means “a divergence between the market price of a security and the fundamental value of that security,” according to a definition from the Corporate Finance Institute (CFI). “The divergence can be due to a financial crisis or a current event in the economy.”
The CFA survey results are focused on the impacts that the current crisis is having on financial markets and the investment management industry.
The survey results were compiled in a report, “Is The Coronavirus Rocking The Foundations of Capital Markets?” CFA members were contacted globally from April 14-24 of this year. “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 percent. The margin of error was +/-0.8 percent,” according to the CFA.
Some of the highlights of the results follow:
Asset Mispricing
“A resounding 96 percent of respondents believe the crisis could result in asset mispricing specifically related to the current situation, with no regional variations. In equal proportion, respondents indicated that the two reasons why this would be the case are liquidity dislocation (38 percent) and distortion of natural market pricing because of government intervention (36 percent),” according to the report.
“Respondents in Asia were most concerned with liquidity (45 percent to 48 percent) whereas North America and Europe showed higher levels of concern about public authorities distorting prices (39 percent). Of note, dubious professional practices and ethics did not cause concern (2 percent) as regards asset mispricing,” according to the report.
Regulatory Action
“Respondents are clear on a number of points. A large majority agree companies that receive emergency support during the crisis should be banned from paying dividends or executive bonus compensation (75 percent),” the report finds.
“They also believe a ban on short selling should not be considered (83 percent); a review of exchange-traded funds (ETFs) behavior during the crisis should be initiated to determine the nature of their impact (84 percent); regulators should focus on investor education about risk of investor fraud in times of crisis (94 percent); regulators should focus on market surveillance (82 percent); regulators should not consider imposing security market holidays (82 percent); and regulators should not consider temporarily permitting companies to delay reporting on changes in their financial conditions (73 percent),” according to the report.
“In terms of regional differences, North America respondents were particularly allergic to short-selling bans (91 percent) and were also comparatively more opposed to allowing delay in financial reporting changes (80 percent versus 60 percent in South Asia and 70 percent in Europe),” according to the survey results. “It is interesting to note that the results were a bit more nuanced on whether regulators should suspend non-essential rulemaking and examinations until the crisis has passed (59 percent in favor overall, with again North America least in favor [57 percent] and South Asia most in favor [72 percent]).”
Market Volatility
Oddly enough, many firms are taking a wait-and-see attitude toward market volatility.
“A large majority of approximately three-quarters of respondents are either still analyzing how volatility is moving before they make a decision on strategic asset allocation or are seeing no significant impact from a strategic standpoint,” according to the report.
“The other one-quarter have significantly modified their strategic allocation. On this last metric measuring if firms have had to change their allocation, respondents from Latin America (44 percent) and South Asia (38 percent) appear to have been more affected by volatility jitters than have respondents in Europe (26 percent) and North America (22 percent),” the report finds.
Market Liquidity
“There are significant variations per type of asset and region. For investment-grade corporate bonds in developed markets, a large majority of three quarters of respondents believe that liquidity is down, yet 40 percent overall have seen a positive stabilization impact from the central bank intervention,” according to the report. “The picture is reasonably similar for government bonds in developed markets. However, central bank intervention seems to have had a lesser impact on emerging markets, with one-half of respondents seeing liquidity of government bonds and equities down over there.”
“Liquidity in global developed market equities seems to have suffered less from the market rout, with 31 percent believing the level of liquidity has dropped,” the report finds.
“Of note, only a minority thought we are facing a severe liquidity shock that could result in fire sales and dislocation, potentially indicating that markets at large are not panicking; the highest figure on this issue was found with respondents in Africa, Southeast Asia, and East Asia, of whom 29 percent, 28 percent, and 27 percent respectively thought emerging market equities were facing a severe liquidity shock,” according to the report. “Southeast Asia respondents were also, conversely, at 26 percent, the region to believe the most in an actual uptick in liquidity, in this case for government bonds in developed markets.”
Professional Ethics
“Results are not perfectly clear-cut. Overall, 45 percent of respondents think it is likely the crisis will result in unethical behavior on the part of the investment management industry, with 30 percent neutral and 25 percent disagreeing. There are interesting localized differences, with less developed markets in general seeing a higher risk in this regard,” according to the report.
The full report can be found here: https://bit.ly/2ZCeuwg
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