Global Funds Shift Urgently! Two Major Risks Surge, Investors Rush to Cash at Fastest Pace Since the Pandemic

According to the Financial Times, as the Iran war continues to escalate and market concerns about private credit risks intensify, investors are increasing their cash holdings at the fastest pace since the outbreak of the COVID-19 pandemic, with the bullish sentiment that surged at the beginning of the year cooling rapidly.

According to the latest fund manager survey by Bank of America, the average cash allocation in March in fund portfolios rose to 4.3% of assets under management, significantly higher than 3.4% in February, marking the largest single-month increase since March 2020.

This shift signals a clear reversal in market sentiment since the start of the year. In January, the proportion of cash holdings fell to a historical low of 3.2%, reflecting widespread investor optimism about the stock market amid expectations of economic growth.

However, since the U.S. and Israel launched airstrikes against Iran on February 28, both global stock markets and government bond prices have weakened. There is widespread concern in the market that disruptions in oil supply and rising energy prices could not only drag down global economic growth but also bring a new wave of inflationary shocks, thereby weakening the willingness of central banks to cut interest rates.

Analysts at BlackRock stated on Tuesday, "In the face of such short-term supply shocks, there is hardly any genuine safe haven in the market."

Michiel Plakman, Head of Global Equities at asset manager Robeco, also pointed out that investors are "gradually coming to terms" with the reality that the war may last for a long time, which will "impact the market".

Since the outbreak of this round of conflict, the European Stoxx 600 Index has fallen more than 5%, almost wiping out most of its gains for the year; meanwhile, Brent crude prices have surpassed $100 per barrel. The S&P 500 Index in the U.S. dropped 2.6% over the same period, and even before the outbreak of the conflict, the index had already been underperforming markets outside the U.S.

In addition to geopolitical risks, growing concerns among investors about weakness in the private credit sector have further intensified pessimism, while last month’s sell-off in the software sector added to the unease.

Seema Shah, Global Chief Strategist at Principal Asset Management, said that the risk of slowing economic growth could weaken the factors that have "been supporting the market and preventing a significant deterioration in investor sentiment."

She further noted, "I know many tend to see this geopolitical conflict as separate from private credit issues, concerns about artificial intelligence, and other evolving themes, but in reality, once the macro environment changes, these risks are likely to interact with and amplify each other."

Research released this week by Barclays shows that long-only funds have now reduced equity exposure to the lowest level in more than a year, and have instead "opted to hold more cash."

Normally, when risk appetite declines, investors turn to government bonds for safety. However, the current bond market is also under pressure, as the market worries that major central banks may be forced to maintain high interest rates for a longer period, or even reconsider rate hikes. The decline in U.K. government bonds is particularly pronounced, with the 10-year gilt yield rising by 0.5 percentage points since the end of February, and rising yields mean lower bond prices.

The Bank of America survey also shows that the proportion of fund managers expecting global economic improvement over the next 12 months has plummeted from nearly two-fifths in February to just 7% this month; meanwhile, the proportion of respondents expecting global inflation to rise in the next year has soared from a net 9% to a net 45%.

The composite index measuring market sentiment—which encompasses cash levels, growth expectations, and equity allocation—has also fallen to a six-month low.

Meanwhile, European fund managers surveyed by the Bank of America generally expect that European economic growth prospects will face a "significant downgrade." Right before the outbreak of the conflict, market sentiment was still generally "optimistic."

Currently, more than half of European investors expect the European economy to stagnate in the coming months; in contrast, only 15% held this view in last month's survey, when about three-quarters of fund managers still expected the economy to accelerate.