Monday, August 21, 2006

Pessimism sparks dash for cash

Pessimism sparks dash for cash
By Joanna Chung in London
Copyright The Financial Times Limited 2006
Published: August 20 2006 19:11 | Last updated: August 20 2006 19:11

Companies and institutional investors around the globe are holding record amounts of cash – an indication that they are growing more pessimistic over the outlook for future economic and profits growth.

According to the latest data from Thomson Financial, the cash on the balance sheets of the world’s largest 100 companies has now reached $1,100bn and shows little sign of falling.

Cash holdings have been rising steadily since 1999, first breaking the $1,000bn mark in 2004 and they have remained unusually high since then.

Institutional investors are also holding on to more cash, according to recent surveys.

Last week Merrill Lynch said that a net 33 per cent of asset allocators were overweight in cash – an all-time high. “You have to go back to the Iraq invasion of March 2003 to see levels of risk appetite this low,” said David Bowers, an independent consultant to Merrill Lynch.

Jan Loeys, head of global market strategy at JPMorgan, said the high level of cash holdings indicated growing uncertainty among investors.

Views on the future direction of the world economy were polarised, he said, so investors were “building up cash, an asset class that is the safest for them.” The uncertainty comes amid signs that US growth may be slowing.

Data last week pointed to easing price pressures and slowing growth. This month, the US Federal Reserve kept interest rates on hold at 5.25 per cent but the market remains divided over whether it will resume rate rises.

Matthieu Lounages, a portfolio manager at Pimco, the fund manager, said: “Uncertainty and volatility in the market are causing fund managers and corporates to shift away from risky assets and increase their exposure to cash.”

According to Merrill Lynch, the idea that the global economy is going to weaken over the next 12 months is now more widespread among investors than it was a month ago. 52 per cent of respondents to its surveys believe corporate profits will deteriorate in the next year, up from 44 per cent in July.

However, one reason why companies have so much cash is because they have been holding back on capital expenditure despite their booming profits.

Much of the rise in cash holdings is from companies that have benefited from surging commodities. According to Thomson, the percentage of cash held by oil and gas companies has jumped from 5.5 per cent of the total in 2004 to 10.2 per cent now.


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