Fears of getting burned again have Canadians steering clear of equities and sitting on a record amount of cash, says a report by the Canadian Imperial Bank of Commerce.
The bank estimates that wary investors have tucked $45-billion into mattresses and piggy banks over the last 30 months, mirroring the reluctance that resulted in the liquidity bubble that followed the 1987 stock market crash.
But in both nominal and real terms, the value of personal liquid assets is at a record level, CIBC said. Liquid holdings, or cash sitting in either chequing or savings accounts, have risen by more than 30 per cent since the end of 2000.
And while the pace of growth for the liquidity bubble is slowing, it is still one the rise.
“Given the current environment, it is difficult to see a quick bursting of the liquidity bubble,” said CIBC senior economist Benjamin Tal.
“The most likely scenario is that this cash will remain on the sideline for the remainder of the year, with 2004 seeing a gradual and hesitant move from cash into equities.”
Equity markets have taken a beating in recent years. In 2002, markets in the United States suffered through their worst year in a quarter century, posting their third consecutive losing year. In Canada, stocks lost ground for the second consecutive year.
Although stock markets have rallied in the last two months, they are still far below their multi-year highs and a weak economic environment has analysts questioning whether these gains will stick.
The brutal stock environment is evident in investors’ preference to put their money in safer investments. “Actions speak louder than words and in their actions, Canadians still reveal discomfort with the stock market,” Mr. Tal said.
In March, the value of equity mutual funds had fallen to 27 per cent below the level for the same period last year.
That month marked the seventh consecutive month that equity mutual fund redemption outpaced gross sales. That’s the longest losing streak on record, the CIBC report said, and preliminary signs show that April will be no better.
Some of that money has found its way into bonds, CIBC said, which have grown by close to $2-billion over the last year.
“This is a clear defensive action -- pointing to a still relatively high level of risk aversion among investors,” Mr. Tal said.
In addition, Canadians have sold more than $6-billion of their money market mutual funds over the past year. According to CIBC, some of that money has gone into another safe investment - GICs.
Canadians, taking advantage of the recent rise in short-term interest rates, pushed GIC investment up 7 per cent during the year ended in March.
© The Globe and Mail
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