European funds' stash of cash at 2014 debt crisis levels, HSBC says
Analysts at HSBC told clients they remain 'overweight' US stocks even as they pointed out that investment funds in Europe were hoarding the most cash since the sovereign debt crisis in 2014.
At the global level, net flows in equity and bond funds had stalled over the previous three months, with the former registering outflows of $17bn while flows into and out of bonds were flat.
But whereas at the end of May HSBC had highlighted that investors were growing more cautious, that was now coming through in the latest flow data for almost all key regions - with the exception of the US - HSBC said.
"Only a few months ago synchronisation was the big theme in the global economy – with all the major regions of the world growing together. Now, suddenly, the story is divergence, and in particular the divergence between a US economy that is accelerating (helped by hefty fiscal stimulus) and other parts of the world that are slowing," the investment bank told clients in its second quarter report on the economic outlook.
So, while US equity funds had seen $48bn-worth of inflows over the three months to June, European ones - which had fared worst - had seen $24bn-worth of outflows.
"We are overweight the US, given its defensive qualities and good earnings visibility, and we are more cautious on Europe as its earnings revisions remain negative," they said.
Furthermore, funds were increasing their levels of cash, even if from record low levels, with cash levels in European funds left looking "the most extreme" relative to their historical levels.
In aggregate, cash holdings had increased from the record low of 1.1% seen at the end of 2017 to 1.31% in May, while in Europe they rose to roughly 1.8%, which was "close to the level last seen during the sovereign debt crisis in 2014."
According to HSBC, the most immediate threats came from the tightening of US financial conditions, climbing oil prices and trade ward.
Further out, there were "numerous" country-specific risks, with a number of emerging economies under strain, while in Europe political tensions might conceivably pose "an existential risk".
For the time being however, HSBC mused, "these are risks rather than reality".