Canadians sitting on $45-billion of cash
JOHN PARTRIDGE
Wednesday, May 07, 2008
Canadian investors, wary of continued market turmoil, are sitting on a record $45-billion in cash and CIBC World Markets thinks they should be pumping it into the market.
Benjamin Tal, a senior economist at the firm, argues in a Consumer Watch report that by staying on the sidelines instead of pumping the cash into the stock markets, punters are forfeiting billions of dollars in potential gains, just as they did in previous periods of volatility.
“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,” Mr. Tal said in the report Wednesday. “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.”
The economist's arithmetic tells him that $30-billion in potential gains went up in smoke this way after the 2001 episode, and he figures the cycle is now happening all over again. “Fast forward to today's situation and it appears that history is repeating itself,” he said.
However, Mr. Tal also has spotted some dramatic changes.
One key difference, he said, is that younger investors are a lot more risk averse than they were just seven years ago. He calculates that 25-to-49-year-olds are responsible for nearly 40 per cent of the pile of cash now sitting on the sidelines, twice as much as in 2001.
Another measure of just how nervous investors have become? The implied volatility index of the TSX, the report says, has rocketed up by an “incredible” 80 per cent over the past to levels not seen in more than five years.
As well, punters have cashed in a startling $35-billion in equity mutual funds in the past six months alone, and this has helped produce a net outflow on a three-month moving average basis, the worst showing ever, according to Mr. Tal. “Investors are in a bad mood,” he said.
By contrast, money market fund sales hit a record $10.7-billion in the first quarter of this year, giving them a 10 per cent share of total mutual funds, up from 7 per cent last September. As well, cash positions in brokerage accounts are swelling by an estimated annual rate of 15 per cent.
Among Mr. Tal's other findings:
-Canadian households' cash holdings are jumping at a rate of 15 per cent, year-over-year, the fastest pace in more than six years.
-The $45 billion in “extra” cash they are withholding from the market adds up to 10 per cent of total personal liquid assets in Canada.
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