Most financial analysts expect a slower economic recovery, with the greatest challenges to prudent investment management coming from asset mispricing and ethical violations by market makers, according to a new global survey of more than 13,000 CFAs.

Some 44% of CFAs said they expect to see a medium-term ‘hockey stick’ shaped recovery and some level of stagnation for the next two to three years until signs of recovery are visible, according to the survey from the CFA Institute, a global association of investment management professionals. There was little variation in responses from CFAs working in the Americas, Europe, the Middle East, Asia and Asia-Pacific regions.

In contrast, 35% of CFAs believe we’ll see a a slow U-shaped recovery, which would indicate three to five years of a moderate pick up in activity before clearer signs of acceleration, according to the report, “Is the Coronavirus Rocking the Foundations of Capital Markets?”

“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,” said Olivier Fines, CFA, the institute's head of advocacy for Europe, the Middle East and Asia, and author of the report.

When it comes to the affect 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.

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 those in Europe and North America. 

“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,” Fines said.

Almost all the CFAs, 96%, reported believing the crisis could result in asset mispricing, specifically related to the current situation, with no regional variations. 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. 

The pressure the crisis poses in terms of professional conduct was also a concern. Some 45% of CFAs believe that it is likely the current crisis will result in unethical actions in the investment management industry. As a result, a majority of CFAs said 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 CFA Institute said.

Some 76% believe liquidity is down for investment-grade corporate bonds in developed markets, 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, the study found. Only a minority of CFAs 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, the survey found.

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