Yes, cash is back again—this time with a vengeance. Investors have been stashing away cash since the global rout that took place across financial markets last year as fears of a recession multiplied. Those fears dissipated during the first few months of the new year; yet a recent escalation in trade tensions between Washington and Beijing has investors fleeing for the hills again. Global wealth managers have reported that hoarding has continued at unusually high levels, with global funds allocating 6.4 percent of their portfolios in cash—the highest level in six years.
Meanwhile, Morningstar data on more than 1,000 funds shows that net cash allocation has hovered around three percent since late last year compared to a historical average of 2.7 percent.
Wealthy investors are guilty of hoarding more than everybody else, with high net-worth individuals having more than a third of their portfolios in cash during the first three months of the year compared to less than a quarter by the end of last year.
Investors typically increase their cash buffers during times of geopolitical strife, but overdoing it suggests an extremely pessimistic outlook. That appears to be the case with CNN’s Fear and Greed Index swinging from Greed to almost Extreme Fear in the space of just 30 days.
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Source: CNN Money
Sell in May?
‘Sell in May and go away’ is a well-known dictum by stock market investors based on historical underperformance by the market in the May-September period. This wisdom of the crowds appears to be ringing true once again with the S&P 500 down nearly four percent over the past 30 days.
Yet, the ongoing sell-off might have little to do with seasonality.
Related: Bitcoin Eyes $10,000 After Another Bullish Push Speaking to Reuters, Willem Sels, chief market strategist at HSBC Private Banking, said that many investors are choosing to remain on the sidelines because they are struggling to find value in a market where valuations are stretched while the threat of the business cycle coming to an end still looms large. Meanwhile, Christophe Donay of Pictet Wealth Management says investors are trapped in a prisoner’s dilemma with many choosing to do nothing [with their money] as the optimal solution in the ongoing market uncertainty, Reuters reported.
Investors have been increasingly parking their excess cash in government paper, a strategy that has served them well with U.S. notes outperforming stocks over the past six months.
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However, UBS says to tear up that playbook.
The wealth manager forecasts a long-term return of 7.8 percent for global stocks compared to 2.32 percent yield by U.S. 10-Year notes. Interest rates have been steadily falling ever since the Fed changed tact and adopted a more dovish stance.
Putting too much of your money in cash will continue being a bad idea, with the banker predicting a 2.8 percent yield by U.S. dollar cash while the best certificates of deposit (CDs) currently yield 2.75 percent.
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Stock sell-off looming?
On the flipside, Willem believes that having plenty of dry powder minimizes the risk of a massive correction in the equity markets because investors won’t start rushing to sell.
Not everyone shares that optimism though.
According to Avalon Advisors’ Bill Stone, speaking to CNBC, trade war jitters are likely to inflict even more market pain as the market reprices lower odds of a trade deal. Stone has warned that a six percent correction by the S&P 500 from Friday’s close remains a distinct possibility. Meanwhile, Alicia Levine¸ chief strategist at BNY Mellon, says Wall Street could be making a big mistake by failing to fully price-in the possibility that a trade deal between the leading protagonists might never see the light of day.
On Friday, Trump added yet another wrinkle to the trade war and put foreign exporters on red alert for currency manipulation. U.S. Department of Commerce has declared that the country can countervail currency subsidies that it deems to harm its industries and workers. That looks like another thinly-veiled attack on China whose currency has tumbled nearly seven percent against the greenback since the beginning of the year. There’s little evidence of currency manipulation by China though with a Bloomberg analysis finding the yuan to actually be 12.5 percent overvalued relative to its fair value.
Thankfully, even a market correction might only be temporary. Bill Stone says he remains firmly in the bull camp and sees the broad-market benchmark staging a comeback to finish the year at 3,025—a seven percent jump from current levels.
By Alex Kimani for conil.me