CFA Institute – Overview of the impact of Covid-19 on the investment industry – Asian Wealth Management and Asian Private Banking

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1. Why did the CFA Institute release a recent report covering the impact of Covid-19 on financial markets and the investment industry?

2. What were the main highlights of the report?

3. Are there any special takeaways that affect customers in Asia?

Video Transcript

1. Why did the CFA Institute release a recent report covering the impact of Covid-19 on financial markets and the investment industry?

Well, as Covid-19 continued into 2021, we felt there was a lot of noise and interpretation issues in the way the crisis is analysed, especially its impact on capital markets and the asset pricing. So we wanted to leverage our global and professional membership to provide an honest and unbiased perspective on the most critical issues. This follows the first Covid-19 survey we carried out exactly one year ago. And this time around, globally, we have about 6,000 responses, of which about 800 were from Asia-Pacific. And we collected a lot of very rich and insightful data on many levels. So, for example, on market levels, asset pricing, whether QE (quantitative easing) should stay or QE should go, as well as some of the socio-economic consequences resulting from the monetary stimulus that we have seen. And our goal is really that, through the report, policy makers have access to the key insights we have gleaned from our global membership base to better inform policy making in the future.

2. What were the main highlights of the report?

Some of the most interesting takeaways from the reports were asset pricing, whether governments should exit markets, and the socio-economic consequences of some of these economic and monetary stimulus measures. So, when it comes to asset pricing, last year an overwhelming majority of respondents told us that the crisis was increasing the risks of mispricing assets. In fact, the number was as high as 96% last year. And that was due to a combination of liquidity disruptions and government intervention. And this year, what our members have told us is that there are still doubts about whether asset prices will return to normal. And 55% of APAC respondents tell us they believe global developed market equities are fundamentally out of step with underlying economies, have rallied too quickly and should be corrected. here one to three years. And only 3% of APAC respondents thought stock markets were valued correctly. And if we look at the Buffett indicator, which tracks the ratio of market capitalization to GDP, it was at an all-time high in the third quarter of 2020. So the temptation is to keep dancing while the music plays. Now the next question is should EQ stay or should EQ go? What is the moment of the exit of the governments? And this is a very controversial issue. And I think if we take anything away from the report, it’s that our members are quite divided on the issue. Last year when we asked this question, the split was exactly 50/50. This year we are seeing a slight change. So globally, 51% of respondents said it was important to get back to normal as soon as possible, compared to 43% saying it was important to continue supporting people, businesses and society. ‘economy. But, interestingly for Asia-Pacific, the regional view in Asia-Pacific is different from the global dataset. In fact, it’s reversed. In Asia-Pacific, 51% of respondents indicated a preference for sustained action over a normal situation, or 44%. And the Asia-Pacific markets most supportive of continued easing are Japan, Singapore, India and Pakistan, and those most supportive of exit are Australia and China. And I think that’s an important question, it’s also very controversial, as I said. I think the relationship between money supply and inflation and economic growth and productivity is very complex, but I think one has to ask whether QE will continue to be effective if it continues indefinitely. Like all things, there is a law, called the law of diminishing marginal utility, and I don’t think QE is immune.

3. Are there any special takeaways that affect customers in Asia?

One of the questions we asked our respondents was “which asset classes would be most affected if money tightens”, i.e. if there was a tighter monetary policy and if interest rates began to rise. According to our respondents, the top three asset classes that would be most negatively affected were growth stocks, the second, high yield corporate bonds and, for respondents from Asia-Pacific, the third, emerging market stocks. Now, that doesn’t mean there aren’t opportunities. The top three asset classes that would benefit the most are value stocks, the dollar index, and gold. It is therefore a mirror image. I think Asia-Pacific respondents are particularly concerned about emerging market bonds and equities, which is understandable because a lot of Asia-Pacific markets are still developing. And if you look at those results and combine that with the general sentiment or general belief that stock markets have rallied too quickly, that they need to be corrected, and that they’re out of sync with the underlying economic fundamentals, then I think, as investors, we have to look carefully at our portfolios and decide what kinds of risks we would like to take.

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