US funds cash holdings highest since 9/11

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by Glenn Dyer

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The latest monthly survey of big global fund managers from Bank of America reveals a gloomy lot of investors who have gone back to high cash holdings as they try and work out if the US is sliding into recession; understand the impact of the Ukrainian invasion by Russia, China’s slow down and the fallout from rising interest rates around the world.

The May survey shows investors are currently hoarding cash at the highest rate since 9/11 in what Bank of America analysts said was a reflection of “extremely bearish” sentiment among asset managers.

Average cash balances among fund managers surged to a 20-year high of 6.1% in May, with participants naming cash as the asset class they were most bullish on. Earlier this year the highest the cash holdings were was 5.8% but that dropped away, briefly.

Fund managers also liked the usual defensive stocks such as healthcare and didn’t like techs and US shares either, while citing hawkish central banks (the Fed!) and the possibility of a recession as the two biggest risks to their assets.

The survey, which had responses from 331 participants who collectively manage assets worth $US986 billion, was carried out between May 6 and May 12, 2022, so caught the big sell off last week but not the two-day rebound this week.

Besides safety plays like healthcare, investors were also bullish on commodities, while they were bearish on riskier assets like bonds and cyclicals.

And fund managers’ asset allocation to tech stocks was at its lowest since August 2006 — and the allocation to stocks, in general, was at its lowest since May 2020.

Despite the apparent hesitancy toward high-risk assets, BofA strategists speculated that stocks were “prone to [an] imminent bear rally” — but they warned that the market’s ultimate lows had not yet been reached.

The dollar index – which measures the price of the greenback against a basket of other currencies – hit a 20-year high earlier this month, just before the BofA survey was conducted.

That reflects the move into ‘safe’ US dollar assets in times of market instability – but not Wall Street shares.

Of the managers in the survey, expectations of global growth were at a net -72% in May, down from a net -71% in April and reaching a new low level in the history of the survey.

Hawkish central bank increases top the list as the biggest tail risk for managers at 31% (previously 25% in April and just 9% in March), followed by a global recession at 27% (previously 26% in April), inflation at 18% (down from 21% in April), the Russia-Ukraine conflict at 10% (previously 16% in April), a systemic credit event at 7% (no percentage in April) and COVID-19 and an Asian foreign-exchange war at 1% each.

Also, a net 66% among survey respondents expect global profits to decline over the next month, the most since October 2008 and up from a net 63% in April.

When asked how they see the global economy trending over the next 12 months, 77% said they expect stagflation (below-trend growth and above-trend inflation), which was up from 66% in April, and represented the highest percentage since August 2008.

A net 68% of respondents expect lower global consumer price indexes over the next 12 months, up from a net 40% in April and the highest response since December 2008.

In addition, a net 49% of respondents saying they are currently taking lower-than-normal risk levels, up from a net 35% in April.

Asset allocation to US shares fell sharply to a net 13% underweight in May’s survey from 6% overweight in April. The allocation had been as high as a net 55% overweight as recently as January following a peak of a net 62% overweight in April 2021.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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