Feature – Liquidity
How is the liquidity crunch impacting institutional portfolios? Mona Dohle takes a look.
LIQUIDITY: HOW TO AVOID RUNNING ON EMPTY
Imagine if a retail stock-picker invested their life savings in cryptocurrencies last year after being inspired by an advert for a trading platform where American actor Matt Damon declared: “Fortune favours the brave”. Well, if they did, their investment would have lost 70% of its value by now. The bad news does not end there. The investor may not even be able to withdraw what is left of their hard-earned cash as many crypto platforms have temporarily suspended trading due to “market volatility”. Luckily, institutional investors are unlikely to have significant exposure to cryptocurrencies. But the demise of these assets shows how fickle market liquidity, the ease of buying and sell- ing assets, can be. And some argue that crypto markets may well be the canary in the coal mine of an inflated market that is about to dry up. The Covid pandemic triggered an unprecedented injection of central bank liquidity into the markets, with the Fed’s balance sheet expanding to $8.9trn (£7.2trn) from $4trn (£3.2trn) in
22 | portfolio institutional | July–August 2022 | issue 115
the two past years. But this is coming to an end due to rising inflation and the prospect of monetary tightening. That is a concern for institutional investors who rely on a degree of liquidity in their portfolio, not just to pay their mem- bers’ benefits but also to manage potential margin calls and manage their assets effectively. But why have markets dried up so rapidly? How are institutional investors experiencing the sudden deterioration in trading conditions? What strategies are they using to avoid running out of cash?
Tightening Central banks have started the process of monetary tightening and the market response has been dramatic. Since the begin- ning of this year, stock market indices across developed mar- kets have lost more than 20% of their value and that in turn has affected the ease of buying and selling assets. The US Federal Reserve’s latest Financial Stability Review
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