We have already highlighted the potential selling pressure from hedge funds that had blocked redemptions in the final quarter of 2008. The other negative factors affecting demand for stocks in 2009 will be risk aversion by individual savers as well as risk aversion by private and public pension funds that now face significant underfunding of pension liabilities.
In the US, some $320 billion was withdrawn from mutual funds in 2008, and the balance of stock funds (market value - withdrawals) is down to $3.6 trillion in November of last year versus $6.5 trillion in December 2007, according to the Investment Company Institute. The story is the same in Japan, where investment trust (mutual fund) balances have fallen 40%. The negative impact on individual investors however is much larger in the US, where 45.6% of households owned shares in mutual funds, the majority of which had moderate incomes of between $35,000~$99,999 per year.
In addition, public pension funds as well as corporate pension funds around the world were already facing substantial underfunding liabilities. In the UK, only 11% of pension funds were in surplus as of December 2008, and deficits had risen to 136 billion pounds. In the US, the deficit for corporate defined benefit pension plans has risen to a record $409 billion, the largest in 10 years. The US also faces a pension funding shortfall among public pension funds that has ballooned to upwards of $750 billion.
Substantial underfunding of pension funds will, a) force managers to re-assess asset allocation, meaning they are likely to reduce exposure to equities and hedge funds/alternative assets in favor of principle guaranteed fixed income investments, and b) greatly reduce their risk tolerance in all investments.
What this means for Japanese savers is that they have become much more risk adverse and are shifting their savings back into time deposits, as time deposit balances at banks in Japan were rising 5%~6% in November~December last year, while investment trust balances were tumbling. In total, such deposits are now JPY190.7 trillion for Japanese banks alone, and JPY257 trillion including foreign banks and credit unions. In addition, there is some JPY179 trillion of deposits in Japan Post, who is seeing a renewed rise in deposits after losing around JPY10 trillion per year in savings to sexier investment opportunities over the past several years.
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