CASH IS KING / THE FINANCIAL TIMES LEX ( VERY HIGHLY RECOMMENDED READING )

Cash is king

Published: July 14 2010 13:13

Even traders have mornings when it is a joy to come into work. Wednesday kicked off with Intel’s cracking results and Asian economic data so high it looked like a typo; Singapore grew 18 per cent year-on-year in the first half. Markets cheered.

The timing is sweet, since investors are sitting on piles of cash as large as those accumulated in the wake of Lehman’s demise. The question is whether they are ready to splash out or opt to sit tight. The latest (backward-looking) fund managers’ survey by Bank of America-Merrill Lynch suggests the latter. It shows that hopes for global economic recovery have turned negative (a net 12 per cent of fund managers now expect a weaker economic outlook over the next 12 months versus a net 42 per cent expecting a stronger outlook two months ago). Optimism on China, the engine of growth, is waning. Nearly one-fifth of fund managers are overweight cash; indeed, on several metrics, risk aversion is back at March 2009 levels.

But emerging markets, traditionally among the riskiest of asset classes, are on a roll. So while money market funds are pulling in funds – $33.5bn in the first week of July, according to EPFR Global Fund Data, a 78-week record – this has been to the detriment of developed markets. Both bond and equity funds have increased their emerging market weightings in the first half of the year; by some 25 per cent in the case of the former. At first glance this makes sense. Based on growth, debt profiles and accumulation of liquid reserves, many emerging markets look a safer bet than much of the developed world. But it would be naïve to disregard the still-developing governance, institutional and even political structures. More, the very inflows carry some seeds of destruction, fuelling inflation or currency appreciation which in turn undercuts export-led growth. Great starts to the day do not always finish well.

Copyright The Financial Times Limited 2010