The Toxic Cloud Behind the Stock Recovery

The Toxic Cloud Behind the Stock Recovery

While the stock market’s recovery since March has been notable, the “combination of events in the last few months has been toxic for some of the crucial building blocks of the financial system that was already in trouble—pensions.” This according to a recent Bloomberg article.

Pensions are facing problems given inflationary expectations over the next decade. They depend on bonds for the guaranteed income they promise to members— “the higher the yield they pay, the cheaper it will be to guarantee any given income by buying bonds.” While normally, higher inflation would push up the yields payable on fixed-income securities, the article notes “that is only happening to a very limited extent.” That means that real yields are “punishingly low, and largely negative,” according to the article, a “horrible combination for anyone trying to run a pension plan.”

Regarding how pension plans intend to navigate the difficulty, the article offers the following list of assets they find most appealing, citing findings from a long-term research project run by U.K.-based CREATE-Research (which involves regular interviews with powerful pension fund managers from across the globe):

“Pension managers intend to pour money into global stocks, infrastructure, private equity, and a range of long-term debt,” the article reports, adding, “They don’t seem at all convinced about gold, most aren’t allowed to invest in cryptocurrencies even if they wanted to, and, most spectacularly, they have no interest whatsoever in hedge funds.” The report qualifies, however, that U.S. based pension managers are slightly more open to hedge funds given the influence of large university endowments—which had seen great success with them before the global financial crisis. The research reveals a “surprising development,” the article notes: “Pension managers turn out to be enthusiastic about ESG investing.

The article concludes with some broader observations that emerged from the research survey: “There appears to be a shift in psychology driven by the horrors of the last year, and plan sponsors’ understanding of the intractable pension crisis that awaits the future.” It adds, “Many think the current model of capitalism is unworkable,” and that “markets have already been hopelessly distorted by government intervention.” While the response to the market crises of the last several decades has been “cheap money,” the article argues that this has hurt pension funds, a sector for which, “by its nature, the problems will take the longest to emerge. That is the cloud behind the resurgent reflation hopes and continued low bond yields of today.”