The trade war is scaring investors and tightening up markets. Benchmark indices have had a rough time this week and new data on investor flows should add to worries. UBS group, the world’s largest wealth manager, has just put out data on the holdings of its high net worth portfolios. The info shows that the world’s wealthy have 32% of their capital sitting in cash. In the US the figure was lower, at just 23%. UBS think that investors have become too conservative.
FINSUM: This is actually quite a bullish indicator for us. The markets have managed to rise a lot this year and there is still a lot of dry powder to push them higher.
Investors may be worried about a big fall in stock prices, but that is looking less likely than the opposite, at least according to BlackRock. The asset manager’s CEO, Larry Fink, said yesterday that records amount of cash may suddenly flow into the market, driving prices sharply higher. He points out that despite the good year in stocks so far, not a lot of money has been flowing into equities. Fink said dovishness by the Fed has created a shortage of” good assets”, which puts the market further at risk of a melt up.
FINSUM: A melt up could certainly happen, but we wonder what the catalyst would be. Maybe a solid trade deal with China?
Here is a big warning. Goldman Sachs says that with bonds and stocks falling, and the outlook remaining poor, cash will be king. The bank thinks that stocks will only rise by single digits in 2019. In the words of Goldman analysts, led by David Kostin, the chief of Goldman’s research arm, “We forecast S&P 500 will generate a modest single-digit absolute return in 2019. The risk-adjusted return will be less than half the long-term average. Cash will represent a competitive asset class to stocks for the first time in many years”.
FINSUM: Goldman basically think T-bills are a great buy right now and we have a hard time disagreeing. The yields on short-term holdings are very favorable and quite rate insensitive.
Investors beware, the market might be losing its nerve. Back and forth markets for most of this year appear to be making investors very wary, as the market is fleeing to cash. Investor holdings in “cash sanctuaries”, which include money market funds, are approaching 2%, the highest level seen in a decade. According to one prominent asset manager “Cash is an asset class once again”. According to Crane’s, “Money funds were on a starvation diet with yields at zero percent … Rate increases have given them a stay of execution”.
FINSUM: Aside from volatility, the other big driver is that yields on money market funds have risen considerable alongside the Fed hikes, making them much more attractive.