Investors were stockpiling their money in cash last week as the global asset lull snowballed into a full-blown downturn amid fears of a Chinese credit crunch.
Multi-asset managers told Investment Adviser they were building up their cash weightings to protect their portfolios from further volatility, and in the hope of a forthcoming buying opportunity.
The Chinese central bank warned it would not step in and prevent a liquidity drought in the economy, in a move that sent banks’ short-term borrowing costs spiralling and raised new questions about China’s murky ‘shadow banking system’.
This exacerbated the already febrile conditions that stemmed from the recent US Federal Reserve statement that it was set to start winding down quantitative easing (QE) later this year.
‘Safe haven’ gold suffered severe losses, with the price per troy ounce dropping to $1,200 – a level not seen since 2010 – as UK gilt yields hit their highest levels since 2011.
Chinese equities officially entered bear market territory after the Shanghai Composite index shed 5.3 per cent last Monday (June 24).
The FTSE 100 index suffered its first negative quarter in a year, in spite of conciliatory statements from central bankers later in the week.
Nicolaas Marais, head of multi-asset investments at Schroders, said his team had raised cash levels across their portfolios as “only the dollar and cash have given protection” as asset prices have fallen.
“It would be irresponsible of us not to build the portfolio in response to more bouts of volatility. Markets are caught between a return to growth and the pain of less liquidity,” he said.
Premier’s multi-asset manager Neil Birrell said markets were “in a period of transition” as investors gradually adapt to the prospect of central bank stimulus being withdrawn, adding that he had raised his cash level to 9 per cent.
“I won’t take that cash level down until I am more certain,” Mr Birrell said.
“A reduction in QE is reliant on US macro numbers, and the numbers aren’t very reliable at the moment.
“There is no clear trend of good news which leads us to be wary of redeploying cash.”
Mark Parry, senior investment manager in Aberdeen’s multi-asset team, agreed that it was “not clear that equity markets should progress from here”.
He cited a lack of liquidity and earnings momentum as factors which could hamper stockmarket gains.
David Jane, founder of Darwin Investment Managers, said he had been holding 20 per cent in cash for some time.
He described the market falls as “brutal” and said there had been “not really anywhere to hide”.
John Ventre, Old Mutual Global Investors’ head of multi-manager, has also raised cash in several of his portfolios and warned investors were in for a “pretty choppy summer”.
The manager said if US 10-year government bond yields headed back towards fair value of “probably 3-3.25 per cent”, the move would “make it difficult for equities to go up”.
“It is possibly creating a buying opportunity but not just yet – I can see a scenario where this has further to run,” he added.
