Cash seek­ing new homes

Bil­lions al­ready flow­ing into stock mar­kets and mu­nic­i­pal bonds

Finweek English Edition - - Creating Wealth - LU­CAS DE LANGE bdl@vo­

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.

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