While signs of resolving uncertainties emerge, sending indices such as S&P 500 to record highs, many investors remain cautions about the global economy's outlook, and have been seeking refuge by upping their cash allocations.
Jang Dong-hun, chief investment officer of Korea’s Public Officials Benefit Association (Poba), for example, told AsianInvestor that the pension fund had been maintaining a comparatively high cash level since last year, given the relatively later stage of market cycle.
"It will probably keep the current position during the coming months," said Jang, adding that the fund requires more liquidity to cope with the need to hedge its foreign exchange exposure.
Within Poba's cash allocation, Jang said the fund mainly invests in money market funds for cash reserve.
As an alternative, Jang said Poba has been expanding investment into Reit and open-ended funds as a part of real estate portfolio for liquidity.
Meanwhile, asset managers have been holding a relatively high levels of cash. According to Bank of America Merrill Lynch's October fund manager survey, cash levels climbed to 5% in October from 4.7%, just above the 10-year average of 4.6% and 0.7 percentage point below the recent high in June.
So the question the editorial team asking investment experts this week is: Are investors raising their cash or cash equivalent holdings as a hedge against market uncertainty? If so what sort of money market or similar instruments are most appealing, or are other strategies preferable?
Two fund managers, one wealth manager and one investment consultant executives shared their thoughts.
The following extracts have been edited for clarity and brevity.
Sunny Ng, global multi-asset portfolio manager (Hong Kong)
Cash in our portfolio has been at a higher level over a little while, but over the last two months we have been reducing cash and allocating towards more cyclical areas of the market and risk assets such as emerging markets and equities, and select commodities.
We like and see value in two areas within equities at the moment: one is mostly related to businesses investment picking up, such as technology and consumer discretionary in the US, and other area is more manufacturing-related outside the US, including China A-shares and South Korea equities. We have also increased allocation to European small-cap as well as Japanese equities, which also tends to be more cyclical than the US.
Within credit, we are looking at moving towards select emerging market local currency debt, where we see favourable fundamentals and high real yields.
We are therefore rotating towards the more cyclical areas of the market which have been punished over the past 18 months. The driver of the rotation is the easing of trade tensions and global monetary policy which will act to unlock business investment, which has been the primary source of manufacturing weakness. Global monetary easing around the world, which has a strong lead/lag relationship with global manufacturing, is set to pay off in the months ahead.
Pierre Chartres, fixed income investment director (Singapore)
We haven't been increasing our cash allocations, per se. You can easily find cash alternatives in the fixed income market, so you can hold securities that behave similarly to cash or provide the same benefit, such as short-dated US treasuries.
If you take a broad view, we have been de-risking our portfolios over the past weeks, especially in higher risk corporate bonds. We are being a bit more defensive, cautious and selective, and we want to keep some powder dry in case there's a market selloff and then we can redeploy our capital to more interesting opportunities.
The best alternative to cash is investing in short-maturity US treasuries, at least for US dollar investors, and that's what we have been doing across some of our strategies. So we have a minimum amount of cash, but can increase our allocation to risk-free government bonds, such as US treasuries, gilts, and bunds when we need to reduce risk in our corporate bond portfolios.
Martin Hennecke, Asia investment director (Hong Kong)
St. James’s Place
There are many investor concerns today, ranging from the yet unresolved trade war to recession risks, to geo-political tensions and rising sovereign debt levels globally. From our point of view, it is important to focus on the bigger picture. Short-term market movements may easily go either way, and short-term market timing attempts can have significant adverse impacts on long-term performance.
It should be noted that any asset class is subject to risks, including cash and money market funds, which are vulnerable to inflation, especially in a world of mostly negative real interest rates.
Therefore, whilst we would advise investors to be conservative in terms of avoiding the use of leveraged debt generally where possible, at the same time we are not recommending holding significant amounts of cash beyond emergency funds.
In terms of economic risk considerations, a recent academic study on the correlation of economic growth and stock market performance interestingly found an inverse correlation between the two. This may be explained by markets often having already priced in bad news, such as in Hong Kong (including Hong Kong listed China stocks) where many companies’ valuations trade not far from historic lows at present.
Paul Colwell, head of advisory portfolio group for Asia (Hong Kong)
Willis Towers Watson
We saw moves towards a more defensive bias in 2018, including greater allocations to cash, as monetary conditions were tightened and liquidity withdrawn from markets. This could have negatively affected the US or global economy and financial returns. However, this has been tempered with the change in the Federal Reserve’s stance earlier this year that gave investors the confidence to take on more investment risk.
Looking ahead, we maintain a cautious perspective. Monetary measures initiated this year will help, but it’s likely the global economy will slow down, exasperated by reduced business confidence, the ongoing US-China trade war and economic indicators suggesting a recession in Europe and Japan.
It’s also worth noting that the 10-year excess returns (over cash) for a simple equity/bond portfolio have been among the best on record. Equities and bonds have performed well in 2019, but we’re concerned that it will be difficult to see this repeated.
Given market pricing, our lukewarm outlook and the desire to design portfolios against a range of scenario outcomes, we advise clients to diversify to asset classes that are less reliant on the economy, for example liquid alternative strategies like hedge funds and alternative betas. Furthermore, we recommend moving away from traditional bond markets to higher-yielding forms of credit, such as securitised markets, Asian bonds and Chinese bonds.