Cash seeking new homes
Billions already flowing into stock markets and municipal bonds
THE MASSIVE AMOUNTS of cash that have built up in the United States – by far the largest player in the international financial markets – since the subprime crisis hit the world, are cautiously beginning to look for new homes.
Yields on cash, bank deposits and money market funds are minimal and, judging by figures revealed by a Merrill Lynch survey of fund managers, investor confidence is gradually returning. The percentage of investors overweight in cash in their accounts is falling markedly. In March it was still at 41% but by end-April only 28% were overweight. That sharp fall is regarded as a direct indication that confidence is returning and that the appetite for risk is improving.
One of the markets benefiting is Wall Street – as is shown by the 40% improvement in the Standard & Poor’s 500 index since March. However, the index has reached a critical level, since it’s been thrown back at its 200-day moving average. Investors worldwide use that average as an important benchmark to help them decide whether there’s a bull or a bear market. The graph confirms the bear is still dominant. The fact the price has been turned back at the average is regarded as confirmation that many investors regard the upswing since mid-March as a correction in an oversold bear market.
During previous bear markets corrections have often ended at a 200-day moving average that is still declining, which then heralded a continuation of the bear market. In other words, the market dropped from that point, partly due to profit-taking. What will be regarded as positive is whether the downswing ends at a higher level than the low of March.
Though the JSE all-share index has succeeded in breaking slightly through its 200-day average, it’s also still clearly in a bear market. Whether it can progress much further should Wall Street weaken is doubtful – because everyone follows that market leader.
Another important trend is that US municipal bonds are regaining their popularity – much to the relief of state governments and local authorities, which rely heavily on public loans, especially for funding new infrastructure. More than US$9bn was withdrawn from this market in fourth quarter 2008 while market losses were responsible for a further blow of $42bn. The more than 1 700 mutual funds in the US that invest in municipal bonds suffered badly in the process.
But there’s a notable improvement. AMG Data says the flow of money into this market is now almost $2bn/week, resulting in a firming of prices. So far this year the recovery has been R24bn and – very important – municipal authorities are able to obtain loans again for spending on infrastructure. That should help job creation.
According to figures released by the US Federal Reserve, institutional and private investors were sitting on nearly $9 trillion (R74 trillion) in cash at the beginning of this year. The fall in the amount lying in money market funds (which hardly earn anything) gives a good indication of what’s happening. The days of a massive inflow of funds to the money market are past. Of a total of almost $3,7 trillion invested there, $35,5bn flowed out in February – and that increased to $51,15bn in March. In April $18,7bn flowed out. The May figure should be considerably higher than April’s.
Bank of America
Securities-Merrill Lynch believes the money is being invested over a wide front. For instance, international strategy joint head Gary Baker says the logjam in sector rotation is over due to the improved market sentiment and that means there’s now a noticeable switch from defensive to cyclical stocks. Portfolios are still underweight in shares and it remains to be seen when managers will be prepared to return to more normal levels.
Which shares are being bought? The general view is that it’s especially the heavyweights, since that’s the only place the huge amounts available will find a large enough home. The Dow Jones Global Titans Fund, which invests in the world’s 50 biggest listed companies, is a channel to those behemoths, which include companies such as Nestlé, Exxon Mobile, Toyota, Roche, Samsung and Procter & Gamble. The fund is therefore one worth watching for a guideline about the market’s future direction.
During previous bear markets, the flow of cash to new, riskier homes contributed to a more positive climate in the US – where, as usual, the next economic upswing and bull market on stock exchanges will begin.