The Strategist

Share of cash in global investors portfolio is growing

06/19/2019 - 12:24

The stock of cash in portfolios of international investors has been growing at a record pace over the past eight years. The share of cash reached 5.6%, and this is the maximum value since the fall of 2016. The increasing risks of a trade war between the United States and China are forcing investors to reduce investments in risky instruments. The released liquidity is transferred into debt obligations of developed countries.

International investors have significantly increased the stock of cash in their portfolios, according to the June survey of portfolio managers conducted by analysts of Bank of America Merrill Lynch. The survey included representatives of 230 funds with total of $ 645 billion under management. According to the paper, the average share of cash increased to 5.6%, which is the maximum level since October 2016. This result was 1 pp higher than the value of May. There hasn’t been such a rapid increase of cash volumes in investors’ portfolios for almost eight years, since August 2011. Then, against the background of the S&P agency’s decision to downgrade the credit rating of the USA from AAA to AA +, the leading US indices fell by more than 8%, while the share of cash in investment portfolios grew by 1 pp to 5.5%.

At present, international investors are concerned about escalation of the trade dispute between the United States and China. According to the survey, 56% of managers described the trade war as a key risk with unpredictable consequences for the global economy. The managers also spoke about a possible recession in the global economy. According to the survey, the number of respondents confident that in the current year the growth rate of the world economy will slow down by 50%, exceeded the number of those who are more optimistic.

A month earlier, the numbers of optimists and pessimists were the same. Investors were more worried about the economy in December last year. However, current levels correspond to the recession values of 2000-2001 and 2008-2009.

Under such conditions, large portfolio investors are getting ready for a long-term “bearish” market and therefore are reducing investments in the most risky assets - stocks. According to the BofA survey, the number of managers with the level of investments in shares less than the indicative level exceeded the number of those who increased them by 21%. A month earlier, there were 11% more optimists. This is the lowest level since March 2009. Position of investors in stocks of developing countries were reduced the most of all. The number of managers with weight of such shares in portfolios exceeded the indicative level fell by 13 pp, to 21%. According to Emerging Portfolio Fund Research (EPFR), over the past four weeks, international investors withdrew almost $ 8 billion from the funds of developing countries. Investors have also withdrawn over $ 10 billion more from funds of developed countries.

Part of the released liquidity was transferred to purchase of bonds. According to EPFR, over the past month, international investors have invested $ 120 billion in bond funds and money market funds, and the sum amounted to more than $ 430 billion since the beginning of the year. Investors buy mainly US sovereign bonds, as well as Germany and Japan. On Tuesday, the yield on ten-year US Treasuries dropped to its lowest level since September 2017 - 2.016% per annum, while a month ago it was 2.6% per annum.

Following the Federal Reserve System (FRS), Head of the Bank of Japan said last week about easing of monetary policy. On Tuesday, the idea was supported by Heads of the European Central Bank and the Bank of England.


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