Institutional investors have moved into cash holdings to a greater extent than at any point since the immediate aftermath of the 9/11 terrorist attacks back in 2001. At the same time, private investors are reportedly enthusiastically buying equities in the belief that prices are currently attractive and they will benefit when stock markets recover. It’s a marked difference in strategy. Do institutional investors know something private investors don’t?
A recent Bank of America study of fund managers’ sentiment revealed a majority are now sceptical on how quickly they believe the economy will bounce back. They see the biggest risk to an economic resurgence after lockdowns end as a possible second wave of the Covid-19 pandemic. A spike in corporate debt defaults is another major worry, with 90% of fund managers concerned that is a scenario that could threaten financial stability.
The response to that concern and uncertainty among fund managers has been a retreat to cash. 5.9% of the assets controlled by surveyed fund managers were held in cash this month, up from 5.1% a month ago. The ten-year average of cash holdings is 4.5% of total assets under management.
Private investors seem convinced the economy will bounce back quickly after lockdown restrictions are lifted. That scenario has been referred to as a ‘V-shaped recession’ – one that cuts deep but is short in duration. But only 15% of fund managers are confident that’s a likely scenario. A majority of 52% are betting on a longer U-shaped recession while 22% expect a double-dip ‘W-shaped’ recession that comes in two stages, interrupted by a period of unsustainable recovery.
The survey was conducted between April 1st and April 7th, so the sentiment of fund managers took into consideration the start of the rally from the stock market lows reached on March 23rd. As well as upping cash reserves, institutional investors have increased equities allocations to more defensive stocks such as consumer staples, supermarkets, utilities and healthcare companies. They’ve scaled back on stocks that benefit from more discretionary spending and are typically cyclical in nature. Energy companies have been dumped in a mass sell-off of the sector.
U.S.-based institutional investors are particularly wary of London-listed stocks at the moment, with net allocation down 31% compared to minus 11% for eurozone stocks. The chief investment officers and portfolio managers taking part in the survey, more than 200 of them, are responsible for almost $600 billion in client assets.
So should private investors also be scaling back their strategy of continuing to invest now? They have an eye on picking up the near 30% markets are down on pre-pandemic February highs but have they moved too early?
Not necessarily. Private and institutional investors have different considerations and priorities. Private investors, at least if they are some years away from the point the will begin to draw down on their pension, have time on their side. As long as their general personal finances are secure and include an emergency buffer, it doesn’t really matter to them if the market recovery happens quickly or takes longer. In fact, there is an argument that a longer period in the doldrums for stock markets could turn out to be a long term positive for them. If they are investing monthly, the longer prices stay cheaper, the more they can buy at levels that will offer strong returns when things do get better.
Institutional investors, on the other hand, are under pressure from their investors to outperform the market by minimising losses. If they don’t, investors could panic and start to pull their funds, which would spell trouble for them. Institutional investors, then, have to find a balance between containing short term losses while still planning to take advantage of the eventual recovery. Private investors have greater freedom to ignore short term drama.
And the negative stance on UK stocks? That’s taking into consideration the heightened risk to the UK economy of combining an exit from the coronavirus lockdown with an exit from the free trade agreements of the EU. It doesn’t mean London-listed companies are not good quality stocks to invest in. And of course, most of those that form the FTSE 100 make much or most of their revenues internationally in any case.
But it does reflect a generally heightened unknown factor around the UK economy as a whole. Even during less volatile times for the UK, it makes sense for investors to spread their risk by investing internationally. Different economies do better at different times and not putting all your eggs in one basket is always a wise approach.