- A Bank of America survey of fund managers with a combined US$1 trillion in assets found that average cash holdings among professional investors soared to 5.3% this month, up from just 5% in January and the highest level of cash stockpiling since May 2020, in the early days of the pandemic.
- Rising cash allocations however should not be misinterpreted for an endorsement of stuffing your money into your mattress.
In the world of investments, cash, is rarely (if ever) king.
Because of the ill-effects of inflation, cash actually loses value over time and most professional investors would want to at the very minimum keep their money in safe, liquid investments, like money market funds or Treasuries, to at least try and keep up with inflation.
But the volatility in markets has meant that there has been very few safe harbors of late, with U.S. Treasury yields spiking (yields rise when bond prices fall), penalizing bondholders, and equities hammered by everything from tightening monetary policy to a potential Russian invasion of Ukraine.
Nonetheless, as idle as cash is, a Bank of America survey of fund managers with a combined US$1 trillion in assets found that average cash holdings among professional investors soared to 5.3% this month, up from just 5% in January and the highest level of cash stockpiling since May 2020, in the early days of the pandemic.
That shift into cash comes against a backdrop of equities hammered by the prospect of central bank policy tightening – the MSCI World index that tracks global stocks is down almost 6% since the beginning of this year, while Bloomberg’s government and corporate bond tracker has slipped 3.5% over the same period.
Given the lack of “safe” havens, more professional investors are choosing to stay in cash instead.
Investors currently receive next to nothing from the cash stashed in U.S. money market funds, whereas these products provided yield of over 2% as recently as 2019.
Rising cash allocations however should not be misinterpreted for an endorsement of stuffing your money into your mattress.
Instead, higher cash hordes are emblematic of investors uncertain over the prognosis of the path forward.
Given that equity and bond prices could both move lower and in unison should another interest rate led selloff occur, the “smart” money is understandably keeping plenty of dry powder available, ready for deployment, once things become clearer.
When exactly that is however, is less certain.
The U.S. Federal Reserve has seemed of late to be inclined towards a policy of strategic ambiguity under the guise of “nimbleness.”
And everything from potential Eastern European conflict to traders pricing in slower growth have meant that whereas the Fed of the past could dot plot with some degree of certainty, things are far from set in stone in the current epoch.
Against this backdrop, holding on to more cash may not just be prudent, it may be prescient.
