COVID-19 is likely to lead to large-scale bankruptcies, reveals CFA Institute survey

A new report ‘Is the Coronavirus Rocking the Foundations of Capital Markets’ by CFA Institute, the global association of investment management professionals, analyzes the effects of the coronavirus pandemic on the global economy, the capital markets, and the investment management industry. The survey showed that 42% of Asia Pacific (APAC) respondents predict large-scale bankruptcies, while 50% of APAC respondents expect that the crisis may induce growing unethical behavior in the investment management industry (against a global response of 45%).

The global survey found that CFA Institute members in general share a rather conservative and prudent view of the potential recovery, with close to 80% of respondents thinking any recovery would be slow or stagnant in the short term before picking up eventually in the medium term.Of more than 13,000 respondents, 44% see a medium-term, so-called hockey stick-shaped recovery, which would imply some form of stagnation for two to three years before a steady pick up. 35% of the respondents see a so-called U-shaped recovery, essentially only mildly more optimistic in the short term than those predicting a medium-term recovery. Only 10% envision a quick recovery, also known as V-shaped and 4% are predicting long-term economic stagnation.

The survey also found that 96% of CFA charterholders think that the current crisis increases the chance of asset mispricing.The survey also reveals that overall, 39% of CFA charterholders globally and 46% in India expect large scale consolidation of firms.

Speaking about the survey, Vidhu Shekhar, CFA, CIPM, Country Head, India, CFA Institute said,”In this report, we seek to analyze our global members’view on the underlying economic trends as the crisis owing to COVID-19 virus continues to unfold. In this survey, we had seen large scale participation of our Indian members, fourth-largest overall, with our responsesbeingclose to the global averages. Our members around the globe are uniquely positioned to opine about what the economic recovery might look like as they lead the investment profession’s thinking in critical areas like portfolio management, capital markets integrity, and practice excellence.”

“It will likelytake two to three years for most economies to return to their pre-pandemic levels of output.Like other industries, the investment industry is also going to be reshaped by this crisis, and it is important to rebuild on a solid foundation.For investors in India, it will be very important to think about long term financial security through capital preservation, which will take care of their standard of living, future of kids and money for retirement in long term” said Vidhu Shekhar, CFA, CIPM, Country Head, India, CFA Instituteabout investment industry.

Key findings from survey for Asia Pacific:
• Impact on the asset management industry, and on the role of finance and globalization: Members are predicting large-scale bankruptcies (42%) and an acceleration of automation to reduce costs (39%). Further consolidation was also a theme (36%), as well as the potential reduction in the globalization of financial markets and investment flows, and divergence between emerging and developed markets (34%).

• On ethics in times of crisis: 50% of members in APAC think it is likely that the crisis will result in unethical behavior in the investment management industry (global 45%), with 28% neutral and 22% disagreeing. Respondents in Malaysia and Singapore were the most concerned in this regard, while those in Japan were the least concerned.

• On market liquidity: According to survey respondents, liquidity in equities and bonds in both developing and emerging markets has gone down because of the pandemic. At the headline level, figures in APAC are in broad alignment with global figures but this belies intra-regional disparities. 33% of respondents in APAC believed that liquidity in developed market equities and government bonds was down (global 31%), with India and Japan leading at 43% and 42% respectively, compared with a result of 23 to 25% in Malaysia and Australia. For emerging markets equities, liquidity was also down but more respondents in APAC reported a liquidity shock (27%) when compared with global respondents (23%).

• On the regulatory response: 41% of respondents in APAC believe that regulation on market conduct should not be relaxed to encourage trading and liquidity (but 35% thought that it should be relaxed), with 75% of respondents suggesting that regulators should proactively seek the appropriate response through consultation with industry on a possible solution.Additionally, respondents hold strong views on what regulators should and should not do:
o 72% believe that companies that receive emergency support during the crisis should not pay dividends or compensate executives with bonuses, like that found globally (75%)
o A ban on short selling should not be considered (72%), global response stands at 83%
o A review of ETFs activity during the crisis should be initiated to determine the nature of their potential systemic impact (86%) (Global – 84%)
o Regulators should focus on investor education about the risk of investor fraud in times of crisis (95%) as well as continued market surveillance (83%)
o Regulators should not consider imposing security market holidays (81%) or temporarily permitting companies to delay reporting on changes in their financial conditions (60%)

• On members’ employment situation: While it is too early to predict the longer-term effects on employment, about the same percentage of respondents see no change in their firms’ hiring plans (43%) or their firms adopting a hiring freeze (42%), with 13% saying that their firms were downsizing their workforce.

The survey was fielded to the CFA Institute’s global membership across all regions and jurisdictions where the organization has representation, in the month of April’20. 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%. The margin of error was +/-0.8%. In the APAC region, participating markets included Australia, mainland China, Hong Kong SAR, India, Japan, Malaysia, Pakistan, and Singapore.

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