Cash weightings begin to fall after RBA pause

Investors are entering 2024 with high weightings to cash as a result of the rising interest rates but allocations are starting to fall in favour of equities and fixed income.

The Reserve Bank of Australia has set interest rates at 4.3 per cent, a four percentage point rise since May 2022, and there is at least one further rate rise expected. 

However, RBA governor Michele Bullock opted to pause in three of the last four months of 2023, prompting investors to move to a smaller position at the end of the year.

Speaking in December, Bullock said: "There are still significant uncertainties around the outlook. While there have been encouraging signs on goods inflation abroad, services price inflation has remained persistent and the same could occur in Australia. There also remains a high level of uncertainty around the outlook for the Chinese economy and the implications of the conflicts abroad. 

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"Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks."

There will be no RBA meeting in January so the next rates decision will be on 6 February.

According to the latest State Street Institutional Investor Index, investors ended the year with a higher weighting than at the start. 

“Investors’ allocations to cash ends 2023 higher than where it began the year. So even though equity and bond markets look a little overbought by some price metrics, this is not the case when looking at investors’ actual allocations,” the firm said.

“Allocations to cash are still more than a full percentage point above long-term averages, which highlights the potential for money to flow back into asset markets if conditions remain compelling.”

However, cash weightings fell in November and December with money instead flowing into equities and fixed income. Cash allocations in December fell by 0.3 percentage points to 19.9 per cent but still sit at an overweight position.

Michael Metcalfe, head of macro strategy at State Street Global Markets, described this as a “constructive move”.

“Asset managers lowered their cash holdings for the second consecutive month; a constructive signal for markets as we begin 2024 given they are still overweight cash. The implication is that managers are more focused on the promise of more supportive monetary policy than the Chinese disinflation.”

The State Street data follows research by Bank of America for its monthly Global Fund Manager survey which found respondents’ cash allocations had seen a “collapse” from 5.3 per cent in October to 4.5 per cent in December.

Investors were holding their lowest allocation to cash since April 2021 at a net 3 per cent overweight and increasing their equity weightings to the highest overweight since February 2022.