The coronavirus crisis is going to leave financial markets quite different from where they were before March. According to a report prepared by the CFA Institute following a worldwide survey among its associate professionals, 83% of managers ask the respective authorities not to prohibit short sales in case of regrowth as they did in stock market crashes at the start of the pandemic. Furthermore, many fear a return to unethical behavior in the management industry and a majority anticipate a slowdown in the growth of passive funds.
In Spain, the CNMV prohibited the constitution or increase of net short positions on shares admitted to listing on the Spanish stock market -Ibex 35, Continuous Market and MaB- During two months, from March 17 to May 18. The measure helped stabilize the Spanish market, which five days before had suffered the biggest drop in its history, ahead of Brexit and Lehman Brothers. The Spanish supervisor's decision to ban the shorts was in line with his counterparts in France, Belgium, Austria and Greece, as well as Italy, which brought the end of the ban a month earlier to bearish positions.
Short selling, also known as bearish trading, is a tool that more and more managers use to achieve higher returns for their investors. Instead of buying low and selling high, the usual managers in this practice they sell expensive and they buy cheap, obtaining a profit for the change in the price of the asset. Typically the manager borrow the shares on which you want to carry out the operation, which you do not own, and then sell these shares on the open market at the current market price. Your goal is to buy back those shares at a lower price in the future and return the loaned shares to their original owner. Although other managers also invest short with derivatives.
Listed companies often complain about this practice, arguing that the funds are the ones who sink their price in their own interest and in that of its participants without caring about the future of the company's business. On the contrary, a good part of the bearish managers defends themselves claiming that, thanks to their funds, the market is able to discern bad companies from good ones and thus finds its equilibrium point, since when they get short, it is because the company, even being good, is overheated in the stock market or it is about to fail. And as many managers fear a strong outbreak of the coronavirus and, therefore, further declines in the parquets before the end of the year, Eight out of ten hope that financial supervisors will not cut their wings and allow them to implement this management tool if such a scenario occurs. A good handful of profit would be at stake.
Related to this, 75% believe that companies with emergency aid during the crisis should not pay dividends nor compensate executives with bonuses.
RETURN TO BAD PRACTICES?
Ethics is another aspect that can be damaged in this crisis, especially after the deep purification that managers, brokers and markets have experienced since the great financial crisis of 2008. According to the report by the CFA Institute, entitled 'Is the Coronavirus Rocking the Foundations of Capital Markets? ', 45% of professionals consider that the crisis is likely to provoke "dubious ethics" behavior in the investment management industry, compared to 30% who respond in a neutral position and 25% who disagree. This greater risk is perceived, mainly, in less developed markets. In this sense, 94% believe that regulators should reinforce investor education on the risk of fraud in times of crisis, as well as being extremely vigilant in the market (82%).
In the document, another conclusion also stands out. 58% of those surveyed believe that the crisis is likely or very likely to reverse the progressive trend towards passive investments, which does not stop receiving cash flows. This debate returns to the fore after the world's largest manager, BlackRock, and France's most recognized independent boutique, Carmignac, made their disagreement about ETFs and index funds public, as published by ForexNews.online. The manager led by Larry Fink predicts that passive management will continue to devastate, while the manager of Edouard Carmignac considers it dead. According to the CFA Institute, 84% of professionals believe it is positive to analyze the activity of ETFs during the crisis, to determine the nature of their possible systemic impact.
At BlackRock, they emphasize that "every time we've experienced volatility in the market, the number of new ETF users has increased, and once they start, they generally don't stop." According to one of its top managers, "If there is a limit for ETFs, I think we are still far from it." However, the second Carmignac executive is convinced that this crisis will lead to "the rediscovery of the virtues of active management, which allows managing market risks and selecting companies capable of differentiating in the long term."