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Big cash holdings in Europe signal unease over market outlook

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Fund managers prefer keeping large sums of money parked until the protectionist war between Washington and Beijing clears up or Britain agrees on a Brexit deal, or data gives them some comfort that the global economy is not so in bad shape.

Milan

STOCKS may have started the new year on a better footing but equity investors in Europe are hanging on to unusually big cash piles, signalling growing unease over the market's prospects.

Worries that turned a promising 2018 into a brutal year remain high and fund managers are dismissing the early rebound as a false start, anticipating more turbulence ahead.

They prefer keeping large sums of money parked until the protectionist war between Washington and Beijing clears up or Britain agrees on a Brexit deal, or data gives them some comfort that the global economy is not so in bad shape.

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"There's no reason to be 100 per cent invested," said Gilles Guibout, head of European equities at AXA Investment Managers, which manages a total of 759 billion euros (S$1.3 trillion) in various assets.

"The bounce we've seen has no real foundations. We remain sceptical on any strong market recovery because many uncertainties have still no answer."

Mr Guibout has raised the cash component of his portfolios to levels last seen around 10 years ago, at the start of the eurozone's sovereign debt crisis. He now holds 4-5 per cent in cash, just below the upper limit allowed by the funds' policies and three times more than last summer when stocks were near peak levels.

And he was not alone in doing so.

According to Morningstar data gathered for Reuters on more than 2,500 funds with around 680 billion euros worth of large-caps European equity, net cash allocation has reached its highest level since May 2017, climbing above 3 per cent in December from a two-year low of 2.4 per cent in February 2018.

The data also showed that funds managed by other big global money managers such as JPMorgan, BlackRock, Allianz, Goldman Sachs and Schroder had also significantly increased their cash buffers to above average levels over the last few months.

Mr Guibout expects to keep that buffer intact, by buying on the dips and selling the rallies: "I'm struggling to see how all these problems could disappear from one day to the other. Without being pessimist I don't think we're out of the woods yet."

A string of data out of Europe on Thursday added to the gloom: German retail sales fell at the fastest rate in 11 years, British car production posted its biggest drop in a decade, and Italy fell into an economic recession.

Separate data from Refintiv's Lipper showed that the average cash allocations for equity funds in Germany and Britain, Europe's two biggest economies, had reached - in 2018 - their highest in at least six years at 7 and 3.7 per cent respectively.

Many fund managers plan to use their firepower to snap up bargains during sell-offs, but one problem they face is the lack of companies that fit their criteria.

Once high-flying stocks like big tech or luxury groups or even the battered car sector appear to be still too exposed to risks of a slowdown, especially in China, while companies in sectors less exposed to the cycle look already over-valued.

"I'm keeping the money until there is enough visibility and to be opportunistic during the earnings season," said Michele Pedroni, fund manager at Decalia Asset Management in Geneva. "Now more than before cash is king and it will likely remain so for a while."

The difficulty in framing investment decisions is reflected in the wide range of forecasts concerning earnings growth.

In Europe, for example, most strategists expect a 4-per cent earnings growth this year, while the consensus still points to around 7 per cent and some forecast negative growth.

Global earnings growth have also been downsized. Such uncertainty had led Mr Pedroni to more than double his cash buffer to nearly 7-8 per cent over the last few months.

On top of that, if the slowdown is too pronounced, earnings may come under more pressure even though central banks may turn more dovish, while if growth resumes monetary policy tightening could return to scare investors.

This conundrum is another incentive to keep cash high. "People are sitting on cash," said Willem Sels, chief market strategist at HSBC Private Banking.

"We need to wait a little bit before we get more economic data or more news on the political side especially on China and US tariffs for people to gather that confidence," he added.

In the fourth quarter of 2018, when global stocks lost 13 per cent, investors poured US$190 billion in money-market funds, the biggest inflow in a decade, according to Lipper from Refinitiv. Another US$2.8 billion was added so far this month. REUTERS