Nervous Canadian investors sitting on excess $45 billion in cash while waiting out market volatility: CIBC World Markets
Canadians likely missing out on billions in investment opportunities TORONTO, May 7 /CNW/ - CIBC (CM: TSX; NYSE) - A highly volatile stock market has nervous Canadian investors pulling back on their investments and sitting on record amounts of cash, finds a new CIBC World Markets consumer watch report. The report finds that Canadians are holding onto a record $45 billion in extra cash they normally would invest in the markets - a decision that could cost them billions of dollars in lost investment opportunities. "Despite the recent recovery in the stock market, Canadians are still sitting on cash positions which in real terms are 15 per cent higher than the already elevated level seen in 2001," says Benjamin Tal, senior economist at CIBC World Markets and author of the report. "The October 1987 stock market correction lasted two months, but investors sat on their newly created mountain of cash for a lengthy 16 months, during which time the stock market gained more than 20 per cent. Ditto for the 2001 flight to safety." By his calculations, sitting too long on the sidelines after the 2001 market correction, cost Canadian investors more than $30 billion - a pattern he sees emerging again in 2008. "Fast forward to today's situation and it appears that history is repeating itself. Investors are sacrificing billions of dollars in potential investment gains," Mr. Tal adds. One of the main differences he sees this time round is a big increase in the risk aversion of younger investors. "As risk aversion rises with age, it is hardly a surprise that older Canadians are the first to make a beeline to the safety of cash. However, what is surprising is the near 40 per cent contribution of Canadians age 25-49 to the current liquidity reserve. This amount is twice as large as what we saw in 2001." He attributes part of the increase to the fact that back in 2001 some of the money these investors took from the stock market went into real estate - an option less attractive or affordable today. The report notes that the implied volatility index of the TSX, a measure of Canadian equity investors' nervousness, has risen by an incredible 80 per cent over the past year, and is now at a level not seen in more than five years. With this heightened concern about the stock market, Canadians of all ages are more risk adverse and have sought "asylum in the safety of cash". "Judging from recent sales and redemptions from equity mutual funds, investors are in a bad mood," finds Mr. Tal. He notes that, on a three month moving average basis, net sales of equity mutual funds are now in negative territory - the worst showing on record. He found that a whopping $35 billion worth of equity funds have been cashed out in the last six months alone. The cash holdings of Canadian households are now rising at a year-over-year rate of 15 per cent - the fastest pace in more than six years. When measured in both nominal and real terms, the current value of personal liquid assets is at a record high. Mr. Tal notes that the extra $45 billion in cash that Canadian investors are sitting on represents 10 per cent of the total personal liquid assets in Canada. "Clearly, safety is in these days. The most popular destination is by far money market mutual funds which have seen cumulative net sales over the past six months rising eight times faster than during the same period last year." Sales of money market funds hit a record of $10.7 billion during the first three months of 2008. In fact, in March, all of the $2.6 billion in net mutual fund sales flowed into money market investment. With balances surging at more than 30 per cent on a-year-over year basis, the share of money market funds as a percentage of total mutual funds has shot up from seven per cent in September 2007 to 10 per cent today. "Money market mutual funds represent only one of many cash instruments in the Canadian household liquidity spectrum, with a value of close to half a trillion dollars," adds Mr. Tal. "In this context, the anxiety about the stock markets also worked to reacquaint Canadians with their chequing and savings accounts, with balances currently rising at over seven per cent on a year-over-year basis. Cash positions in brokerage accounts are also rising by an estimated annual rate of 15 per cent. "The rush into cash during periods of increased volatility is understandable. But in all recent instances, Canadians sat on their cash for far too long after the markets rebounded. If history is a guide, investors who are sitting on the sidelines to wait out the volatility, will again hang onto the cash too long and miss out on billions of dollars in lost investment opportunities." The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/cwcda-080507.pdf. CIBC World Markets is the wholesale and corporate banking arm of CIBC, providing a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.