Written By: Matthew Hemmings – Corporate Finance
Stocks have rallied since the Brexit vote, with the blue-chip index Dow Jones Industrial Average posting a string of record closes lately. But these equity gains have apparently done little to inspire investors to put their money in stocks and other popular investments. According to a survey by the Bank of America Merrill Lynch, cash levels have recently risen to levels not seen since 15 years ago. The survey also showed that 5.8 percent of portfolios are now in the form of cash. These are signs of how fear of risk is spreading quickly even among professional investors as the US moves closer to the presidential election in November.
Zero-risk, zero-return attitude taking hold.
In another recent survey by Bankrate.com, it turns out that as many as 54 million Americans now prefer cash investments to other investment options, such as equity and bonds. This is another indicator of the spreading fear of risk—the zero-risk, zero-return mindset is gaining currency. Analysis of how Americans are investing as the election approaches shows that investors are turning their backs on riskier investments. For instance, the Bankrate.com report shows that 25 percent of American individual investors are going for real estate investment, with 23 percent preferring cash investment. But allocations for equities and bonds are dwindling. Investors are even losing their appetite for the so-called safe-haven assets such as gold and other precious metals. As it turns out, only 16 percent of American investors are putting their money in either precious metals or stocks. Bonds are the least popular form of investment today, with only 5 percent going for them.
The problem of holding cash
Though cash investment is deemed appropriate for short-term needs, over the long-term it has no appeal, experts say. That is because typically returns on cash investments don’t keep up with the pace of inflation, which means that those who hold their investment in cash run the risk of losing buying power.
How Millennials vs. older investors invest.
It turns out that cash as a long-term investment option is most popular among people in the age bracket of 18 to 25 years. They are turning to cash investment for the money they will not need for at least 10 years. Real estate investment is also popular among young investors, running second to cash investment. But cash investment is nearly twice as popular as real estate among young American Millennials.
Older investors in the US feel more comfortable with real estate investment than cash, bucking the trend seen among the youth.
What’s inspiring the appetite for cash investment?
The 2016 presidential election is a major reason why wealthy Americans are holding onto their cash instead of investing it in assets such as stocks, gold and bonds. According to UBS Group AG, investors are worried that the presidential election could damage their retirement accounts. The specific reason for choosing cash investment over other typically popular investment options is that investors think of the November presidential election as being so uncertain. Investors are confident about the general health of the US economy but are wary of the policies of politicians in this year’s presidential election. With memories of the 2008 financial meltdown still fresh on the minds of many investors, stocks are being given a wide berth.
Scary political statements
Some statements made by Hillary Clinton and Donald Trump on their campaign trails have sent shivers down the spines of many investors. Mrs. Clinton has not shied away from attacking drug companies over high costs of medicines. Mr. Trump’s promise of forcing Canada and Mexico back to the negotiation table over the North American Free Trade Agreement worries many investors.
A survey of 2,200 high-net-worth investors by UBS found that 84 percent of them are convinced that the November election will significantly impact their finances, which explains the rising cash levels as the election date nears. Looking at the investment trend for the past five years, it turns out that individual investors have over the period kept an average of 20 percent of their portfolio in cash investments, but the levels are rising quickly.
At UBS, it turns out that the wealthiest investors now prefer to maintain at least 25 percent of their wealth in cash investments. That is happening despite those investors saying that they have bullish outlooks for the overall economy. What you can see happening in America as the presidential election approaches is that investors are feeling too afraid to take risk, and there is risk in that.
The impact of holding cash
Experts say that maintaining high levels of cash can have multiple adverse effects on individual investors themselves and the economy at large. For example, cash investment can negatively impact returns over the long-term given that returns on cash often don’t keep up with the inflation rate. The other problem of holding too much cash is that it complicates the picture for wealth-management firms, the profits of which tend to decline as cash levels rise.
Unconventional easing.
With investors holding on to their cash instead of investing it, economists say that unconventional easing measures such as helicopter money will be a necessity sooner or later. Expectations of helicopter-money easing has increased among fund managers. For instance, 39 percent of fund managers now think that helicopter money will become a reality, compared to 27 percent last month.