Cash holdings among global fund managers have risen to their highest level since the 9/11 terrorist attacks in the US in a shift that reflects large investors' worries about the deteriorating outlook for stock markets.
Cash balances have swelled to 6.1 per cent on average across the portfolios of global asset allocators according to Bank of America, which canvassed views from 288 investment professionals that together oversee assets of $833bn for pensions plans, insurance companies, asset managers and hedge funds.
The shift into cash — which is typically in vogue during periods of heightened risk aversion — coincides with a significant weakening in expectations about corporate earnings. A net 66 per cent of fund managers in May said they expected global profits to weaken, a low comparable to other crisis periods including the 2008 implosion of Lehman Brothers and after the dotcom bubble bust in 2000.
Michael Hartnett, chief investment strategist at Bank of America, said that sentiment among investors was now "extremely bearish" with a net 13 per cent of fund managers swinging to a "underweight" position in equities compared with a net 6 per cent "overweight" in April.
"There has been a lot of damage to investors' psychology and this is the result," said Hartnett.
Wall Street analysts have been revising up their US corporate earnings forecasts for this year since January and Hartnett said that a small piece of good news might result in a temporary market rally. But he also cautioned that the "ultimate low" for equities had not yet been reached with the MSCI All Country World index, a global benchmark, down almost 17 per cent in dollar terms since the start of the year.
The US Nasdaq Composite has dropped by almost a quarter since the start of the year, sinking into a bear market as investors have shifted away from previously highly rated tech companies.
Global fund managers have held a consistently "overweight" exposure to technology stocks for the last 14 years but the allocation plummeted to a net 12 per cent "underweight" in May.
"This represents the biggest 'short' in tech since August 2006," said Hartnett.
Goldman Sachs is holding an "overweight" position in cash and on Monday downgraded equities to a "neutral" position on a three-month view.
Christian Mueller-Glissmann, a strategist with Goldman in London, said that investors would need to see a "convincing peak" in inflation — which is running at a 40-year high in the US — before risk appetite could stabilise.
"Stocks are now negatively correlated with inflation expectations, suggesting investors are much more worried about inflation risks and their impact on equities," said Mueller-Glissmann.
Richard Dunbar, head of multi-asset research at Abrdn, the Edinburgh-based asset manager, said that high and persistent levels of inflation were fuelling doubts over whether the Federal Reserve should avoid pushing the US economy into a recession in order to restore price stability.
"Investors are not yet pricing in a US recession but there is increasing pessimism about the Fed's ability to 'thread the needle' with monetary policy to achieve a soft landing for the US economy," said Dunbar.
Written by: Chris Flood
© Financial Times