Investors have taken a leading role in liquidity, shifting assets from fixed-income and equity investments to the money market, which has reached an unprecedented $5.4 trillion in volume so far in 2023. This flight to cash and its alternatives like money market funds and short-term Treasuries is understandably driven by inflation and slowing economic growth.
Many investors move their deposits from banks to money markets in a context of volatility and relatively high returns on cash instruments. However, conditions have changed so far in 2023, and long-term investors may want to rethink their approach.
The level of cash has registered its maximum in dates close to two recent lows of the market. During the global financial crisis, for example, money market fund assets peaked two months before the S&P 500 index bottomed out on March 9, 2009.
“Volatility in the markets has caused investors to flee to cash…While understandable, this reaction meant suspending investment objectives and giving up long-term return potential,” says Hilda Applbaum, a fund manager at Capital Group.
The equity market began a return of 40% in the following three months and 55% in the following six months. Similarly, during the pandemic, the level of money market funds peaked weeks after the S&P index hit its lowest level in March 2020.
The steady decline in goods inflation is freeing up liquidity for consumers and helping general spending to hold up.” In other words, the tailwinds seem to have been working, while liquidity has been an important weapon in the portfolios of investment fund managers.
The change of direction
But something is changing. The latest data from Bank of America reveals that last week saw the first positive entry into equity funds by fund managers. Liquidity levels will be reduced, while exposure to higher risk assets increases. A dynamic that, precisely, is not the most common at the end of July.
An HSBC report, in fact, says to have more risk exposure at the moment compared to months ago: “We extend our constructive stance on risk assets as fundamentals support the picture… This market momentum is likely to continue well into the summer.”
“Following heavy losses in 2022, more risk-averse investors may consider authorizing some cash to dividend companies, which can offer income generation and capital appreciation, or to certain short- and medium-term debt securities, which have been offering higher yields than in 2022.
I think a lot of investors have stopped believing in balanced strategies at the wrong time,” says Applbaum. “In the future, balanced investment portfolios, whether with a 60/40 or 65/35 ratio, can continue to reap good results,” adds the expert.
The objective of a portfolio that invests 60% in equities and 40% in fixed income is to generate an attractive return while reducing risk, as described. Investors posted heavy losses in 2022 as interest rate hikes triggered by the Federal Reserve sent both equity and bond markets tumbling.
In conclusion, the change in the perception of summer as a season of uncertainty and instability for investors has been reflected today. Confidence has strengthened, leading to a rotation of strategies from the safety of liquidity towards riskier, but potentially more lucrative positions. This shift in investor behavior suggests renewed optimism in the markets and a willingness to face challenges boldly.