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Fund managers are building their cash stockpiles in a sign that many money managers are bracing themselves for turbulence across global markets.
Average cash holdings jumped to 5.3 per cent this month, up from 5 per cent in January, according to a closely watched Bank of America Corp. survey of fund managers with a combined US$1-trillion in assets. That marks the highest level since the early days of the coronavirus crisis in May 2020, the report released on Tuesday shows.
The shift into cash comes during a tumultuous start to the year for many leading asset classes.
The MSCI World Index tracking global equities is down almost 6 per cent since the start of 2022, while the Bloomberg Multiverse Index, which tracks government and corporate bonds, has dropped 3.5 per cent over the same period.
Investor sentiment has been shaken this year by mounting expectations that central banks such as the U.S. Federal Reserve Board and the Bank of England will need to tighten monetary policy aggressively to rein in blistering inflation.
Some traders are now worried the Fed will need to act so abruptly to cool the intense price growth that it will knock the country’s economic recovery off course, something that could weigh on risky assets.
“The start of 2022 has been dominated by an unprecedented hawkish pivot across major developed market central banks,” say analysts at Goldman Sachs Group Inc.
The Wall Street bank advised clients this week to give cash an “overweight” position in their portfolios as it also reduced its outlook on corporate bonds to “underweight.”
Goldman Sachs says the move reflected the “more challenging growth and inflation mix [and] also cash becoming more of a competitive asset class of its own.”
Investors currently receive almost no returns from the cash they stash in U.S. money market funds. However, these products provided yields of more than 2 per cent in 2019 before the Fed slashed interest rates in response to the coronavirus crisis, according to Crane Data LLC.
While even the pre-pandemic yield on money market funds is far lower than the rate of inflation in the U.S., which hit 7.5 per cent in January, holding these vehicles allows traders to avoid ructions in other assets.
Many fund managers had been left badly bruised by recent market gyrations and might have shifted out of “fallen darlings” such as Facebook parent Meta Platforms Inc. FB-Q and into cash ahead of the Fed’s crucial March meeting, says Tancredi Cordero, founder of Kuros Associates Ltd.
However, he adds that the rotation could yet prove short-lived.
“Once we have a clearer understanding of the interest rate path, that will reshuffle the deck,” encouraging investors to spend their dry powder snapping up companies that suddenly look underpriced.
Edward Park, chief investment officer at Brooks Macdonald Group, adds that rising cash allocations, “[do] not represent a conviction view that cash will deliver either nominal or [inflation-adjusted] returns but a concern that equity and bond prices could both move lower together should we see another interest rate led sell-off.”
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