RPT-GLOBAL MARKETS WEEKAHEAD-Refuge in cash harbour as QE2 looms

(Repeats, without changes, story first published on Friday)

By Natsuko Waki

LONDON, Aug 13 (BestGrowthStock) – Investors who bought stocks in
early 2010 are in the red and many may be tempted to switch into
cash — despite the risk that some central banks will renew
efforts to make money more plentiful and therefore cheaper.

Looking beyond Friday’s evidence of startlingly strong
German economic growth in the second quarter, many think the
global economic recovery is already losing momentum.

The U.S. labour and housing markets remain sluggish, while
slowing growth in China’s investment and factory output and
weaker retail sales portray softening domestic demand there.

Over the past week the Federal Reserve has decided to buy
more government debt with the cash from maturing mortgage bonds
it holds, possibly heralding the start of more aggressive
monetary easing. The Bank of England also left the door open for
more easing after it cut its forecast for UK economic growth.

Monetary easing in theory should encourage investors to buy
risky and higher-yielding assets as the return on cash
diminishes. But with a threat of a return to recession, cash
preservation might be more of a priority for some investors.

Backing up this point, fund tracker EPFR’s data shows
investors poured another $5.1 billion in the latest week into
money market funds, which posted their first three week run of
inflows since the first quarter of 2009.

“Quantitative easing is likely to bring diminishing and
ultimately negative returns,” noted Max King, multi-asset
portfolio manager at Investec Asset Management.

“The signal from markets that the global economy is at risk
of a renewed downturn, perhaps caused by policy mistakes, could
be right. Investors should not rush to liquidate investments
…but should consider keeping a sizeable cash reserve for the
opportunities the continuing financial crisis is likely to throw
up.”

Separate data from the industry’s Money Fund Report shows
U.S. money market fund assets rose by $10.3 billion to $2.8
trillion in the latest week.
Various speeches from Fed officials and the minutes of the
Bank of England’s August monetary policy meeting, due in the
coming week, should give more clues about the possibility of
further easing on both sides of the Atlantic.

INTO SAFE HARBOUR

The renewed rush to money market funds — unloved asset
classes during the risk rally in 2009 — reflects disappointment
over stock market returns.

World stocks, measured by MSCI (.MIWD00000PUS: ), are down
more than 4 percent this year, having risen 31 percent in 2009.
Even emerging market stocks (.MSCIEF: ) are slightly down from the
beginning of this year.

“The continued commitment to stimulus should be good for
risk assets. But the market is focused very heavily on the
prospects of a double dip and on weaker demand,” said Mark
Konyn, Asia-Pacific chief executive of RCM.

“Meanwhile, cash is still building up with several
institutions and there is a reluctance to allocate that cash.”

Swiss-based wealth manager Sarasin is overweight on money
markets, and has just reduced its commodities weighting to
neutral from overweight.

“The expected slowdown in growth harbours significant risks,
which is why we remain tactically neutral,” Philipp Bartschi,
chief strategist at Sarasin, said in a note clients.

“We do not see any more potential for bonds at this level.
We therefore remain underweight and have parked the proceeds
from the sale of commodity assets in the money market.”
As for cash, U.S. fixed income manager PIMCO believes
investing just beyond the money market spectrum — in 15- or
18-month maturities rather than 13-month, for example — is
attractive especially as new, more restrictive U.S. regulation
is set to compress money market yields.

The new Rule 2a-7 means money market funds must restrict
their underlying holdings to investments that have more
conservative maturities and credit ratings than before. They
also need to maintain more liquidity.

The changes were spurred by a key U.S. manager, Reserve
Primary Fund, “breaking the buck” when its net asset value per
share fell below $1 at the height of the financial crisis in
2008.

“We strongly believe that the new 2a-7 regulatory changes
will have a dampening effect on money market yields and that the
demand for true liquidity will be very costly in terms of yield
performance,” PIMCO said in a note to clients.

However, it added, the changes also increase opportunities
for investors who don’t need immediate liquidity to seek higher
returns just outside the rule’s boundary.

(Additional reporting by Umesh Desai; Editing by Ruth
Pitchford)

RPT-GLOBAL MARKETS WEEKAHEAD-Refuge in cash harbour as QE2 looms