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Investors have piled into cash at the fastest rate since the Covid pandemic, as the war in Iran and worries over private credit puncture a previously bullish mood in markets.
Average cash holdings in portfolios rose to 4.3 per cent of assets under management in March, up from 3.4 per cent in February and the biggest monthly jump since March 2020, according to a closely watched survey of fund managers by Bank of America.
The figures mark a sharp reversal since January, when cash levels were at a record low of 3.2 per cent, signalling investors’ positive outlook for stocks, boosted by hopes of economic growth.
But stocks and government bonds have tumbled since the US-Israeli bombardment of Iran began on February 28, amid fears that disruption to oil supplies and rising energy prices could dent global growth and cause an inflation shock that deters central banks from cutting interest rates.
“There are few places to hide from this near-term supply shock,” wrote BlackRock analysts on Tuesday.
Michiel Plakman, head of global equity at asset manager Robeco, said investors were “coming to grips” with the prospect of a prolonged war that would “put a dent in markets”.
The Stoxx Europe 600 index has dropped more than 5 per cent since the start of the conflict, reversing most of its gains so far this year as Brent crude rose above $100 a barrel. The blue-chip S&P 500 index — which had been underperforming indices outside the US before the war began — is down 2.6 per cent over the same period.
Concerns about weaknesses in private credit, exacerbated by last month’s software sell-off, have added to investors’ bearishness.
Seema Shah, chief global strategist at Principal Asset Management, said that a slowdown in economic growth risked eroding “some of the reassurances that have been propping up the market and stopping investors and investor sentiment getting very negative.
“I know everyone’s treating this geopolitical conflict quite separate from the other themes that were under way,” such as private credit concerns and AI jitters, she added. “But actually it could end up being quite tied in, if you do get a change to that macro backdrop.”
Long-only funds’ equity exposure is at its lowest level for more than a year, according to Barclays research this week, with funds instead “opting to keep more in cash”.
Government bonds — which investors would typically turn to in a risk-off environment — have also plunged, amid fears that central banks could raise interest rates. Gilts have led the declines, with 10-year yields, which rise as prices fall, rising 0.5 percentage points since the end of February.
The proportion of fund managers expecting the global economy to strengthen over the coming 12 months dropped from almost two-fifths in February to 7 per cent this month, according to the Bank of America survey, while those forecasting higher global inflation in the next year rose from a net 9 per cent to a net 45 per cent.
Investor sentiment — a metric combining cash levels, growth bets and allocations to stocks — fell to a six-month low.
Meanwhile, European fund managers surveyed by BofA expect a “sharp markdown” in investors’ expectations for economic growth across the continent, compared with “ebullient” sentiment before the conflict began.
More than half of European investors surveyed now expect growth to flatline in the months ahead, a meaningful shift from last month’s survey when just 15 per cent expected a stagnant economy while three-quarters of fund managers expected an acceleration.