Skip to main content

Traders work on the floor of the New York Stock Exchange (NYSE) November 23, 2010 after the opening bell.

A wave of cash is overcoming a wall of worry in the world's stock markets, as a massive shift of investment capital is fuelling a market rally that has doubled the value of global equities in less than two years.

On Wednesday, the world benchmark MSCI All Country World stock index hit an intraday high of 345.65, marking an increase of more than 100 per cent from its lows in March, 2009, while Canada's S&P/TSX composite index topped 14,000 for the first time since mid-2008. For the first time in 27 months, the U.S. benchmark S&P 500 in the past week has inched into positive territory compared with its levels of a decade ago.

The global equity market continues to find higher ground this year even in the face of Middle East turmoil, rising inflation fears, Chinese growth uncertainty, and nagging European and U.S. debt worries. The key driver in extending the relentless upward march is an en masse rotation of investment money out of other assets and into the stock market.

"Investors have moved all-in on equities," said Merrill Lynch in a report this week.

Merrill's monthly survey of nearly 200 global money managers, chief investment officers and strategists showed that the rapid flow of funds into the stock market has accelerated in February, tilting the portfolios of the world's leading investment professionals more toward equities than ever before in the survey's 10-year history. Meanwhile, cash holdings are at their lowest weighting since early 2002, and bond holdings are at a five-year low.

The report suggested that the flow of cash toward equities may be a symptom of a "structural re-alignment" among global money managers. Investors have been re-assessing their risk profiles as the global economy puts the game-changing financial crisis of 2008-09 further in the rear-view mirror, and that appears to be playing out in a widespread adjustment of exposure to various asset classes and regions.

A similar picture has been emerging in Canada, where the S&P/TSX composite index is up 85 per cent from its nadir in March, 2009. The Investment Funds Institute of Canada, an industry group representing the country's mutual fund providers, this week reported their biggest January sales total in four years and their third-biggest in the 16-year history of the data, as investors continued to move cash off the sidelines and into long-term funds. Pure equity funds recorded their first positive net sales in 11 months and balanced funds (a mix of equity and bonds) posted their biggest January inflows ever, while cash holdings in short-term money market funds shrank for the 22nd consecutive month.

Canadian money market fund assets (which are, essentially, cash holdings) are less than half of what they were two years ago, and their total of $36-billion is a 22-year low.

In the United States, too, the latest mutual fund data show that the flows of money into equity funds have turned distinctly upward in the first few weeks of this year, at the expense of bonds and money markets.

The numbers suggest that investors everywhere have been moving their cash off the low-risk sidelines and into riskier assets. And the biggest beneficiary in the early stages of 2011 has been the equity market - even as many market watchers have begun to question whether the rally hasn't become overextended.

"This puts the [equity]asset class in potentially over-owned territory … and makes it vulnerable to any macro [economic]disappointment," the Merrill Lynch report said.

"The surge in equity and commodity weightings, uber-low cash levels, rising inflation expectations and crashing [emerging markets]allocations indicate that we are no longer in a Goldilocks environment," added Michael Hartnett, chief global equity strategist at Merrill. "A jump in [interest]rates or weaker growth are the most likely catalysts for a spring correction."

Vincent Delisle, a strategist at Scotia Capital in Montreal, acknowledged that equities have risen so much that "the near-term equity risk-reward outlook is not compelling," and added that he believes the market's "next step is likely a healthy pullback."

But on the other hand, he said in a research report, the trend of fund flows into equities is actually still in its early stages: Flows into pure equity funds have only turned positive in Canada and the United States since the beginning of the year. Mr. Delisle suggested this rotation of money into equities could be ongoing, providing a gravity-defying force for equities.

"The recent leg of this rally has 'flows' written all over it, and it may be premature to bet aggressively against it," he wrote.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe