Why Rich Investors Are Bracing for a Steep Sell-Off as Turmoil Looms

Bullish buyers have sent the S&P 500 Index soaring to a series of record highs this month, but wealthy investors are bracing for a significant market decline by the end of 2020, and now hold, on average, 25% of their assets in cash, according to a worldwide survey by UBS Global Wealth Management that drew more than 3,400 responses. Moreover, 60% of respondents plan to increase their cash allocations yet more, according to a detailed report in Bloomberg summarized below.

“The rapidly changing geopolitical environment is the biggest concern for investors around the world,” as Paula Polito, client strategy officer at UBS GWM, observed in a statement. “They see global interconnectivity and reverberations of change impacting their portfolios more than traditional business fundamentals, a marked change from the past."

Key Takeaways

  • Wealthy clients surveyed by UBS expect a big stock market selloff.
  • They are building high cash balances as a defensive measure.
  • They also seek more diversification and higher-quality stocks.
  • However, they are optimistic about future investment returns.

Significance for Investors

UBS polled investors with $1 million or more in investable assets, which include cash and marketable securities, but exclude residences and personal property. The survey was conducted between August and October 2019.

Other key findings of the survey were: nearly 80% expect volatility to increase, 55% anticipate a significant stock market selloff before the end of 2020, and 62% look to increase their diversification across asset classes. While the average allocation to cash among respondents was 25%, this was down from 32% in an earlier iteration of the survey in May. Also, per a report in Barron's about the survey, 52% are uncertain whether it is a good time to invest now, but 64% are thinking about increasing their holdings of high quality stocks.

Another interesting point is that the bearish sentiment among these wealthy investors relates only to the short term, since 70% are optimistic about investment returns across the next 10 years. This stands in sharp contrast to the long term pessimism of various market pundits, who have been predicting dismal investment returns across the next decade, or even longer, per previous reports.

These investors are responding to short term uncertainty “by really shortening their time horizons and shifting to assets like cash that are safe,” observes Michael Crook, a managing director with the UBS investment strategy team. Meanwhile, Tim Courtney, chief investment officer (CIO) of Exencial Wealth Advisors, indicates that some ultra-cautious wealthy clients have put up to half their portfolios in cash, per another Barron's report.

Looking Ahead

Money fund balances have surpassed $3.4 trillion, a 10-year high, and are still rising. While many observers take this as a bearish sign, strategists at Bank of America Merrill Lynch and UBS, including Paula Polito, have a bullish interpretation. For example, BofAML's proprietary Cash Rule Indicator gives a contrarian buy signal for stocks when cash balances are above their long term averages, as they have been for nearly two years, per The Wall Street Journal.

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