Stocks have become the number one investment asset class for the world’s rich. According to the annual World Wealth Report, stocks displaced cash as a total share of portfolios for the wealthy. The Capgemini and RBC Wealth Management commissioned report defines the rich as those with more than $1 million in assets.
So why are investors preferring stocks to other asset classes?
Well, it’s worth pointing out that stocks only just beat out cash. The difference between the two largest investment classes, as a percentage of portfolios, was minimal.
The share of assets held in stocks increased by 1% to 27%. Meanwhile, cash holdings, as a share of portfolios, fell by 2% to 26%. As you can see, the shift said as much about investors fleeing cash as it did about the appeal of stocks. So what was behind this?
Without doubt, lower interest rates around the globe are pushing investors away from cash. Holding cash reserves just isn’t as attractive for investors seeking stronger returns. Increasingly, the opportunities for high returns are outweighing the risks typically associated with the stock market.
But it may also give us a clue as to why the stocks assets increased among the rich. As the report highlights, stock investors would have seen their portfolios grow in line with rising stock markets valuations.
So there’s two ways to approach the World Wealth Report’s main conclusion about the wealthiest investors.
The first is that stocks are an increasingly attractive option for the rich. That’s certainly possible, and in all likelihood probable.
On the other hand, the appeal of stocks may have remained unchanged year on year. Maybe we’re simply seeing the share of stocks, as a percentage of portfolios, increase as a result of rising stock market valuations.
The truth is probably somewhere in between. But whichever way we look at it, it’s clear that investors remain confident about the future of stocks.
Stock market growth is keeping investors hooked
It’s not hard to see why investors are so bullish on stocks. The report points to the success of the US-based S&P 500, which grew by 11% in the past year, as a sign of this.
What’s more, the value of global stocks has roughly tripled since 2009. China’s contribution to this can’t be overstated either. The Shanghai Stock Exchange has grown by 142% this year alone.
On the domestic front, the Aussie stock market has had a good couple of years too. And it looked set for another strong year in 2015.
Investment bank Citi projected in early January the S&P/ASX200 would end the year on 6300 points. They’ve revised that today to a more modest 6000, after the recent sell-off among big banks.
The banking sector’s woes came on the back of disappointing earnings. Some investors were also spooked by a potential rise in lending capital requirements, and what this could do to profits.
Yet if we take banks out of the equation, the rest of the ASX200 performed comparably to US markets. Citi doesn’t see a repeat of the banking sell-off that could lower future projections. Here’s their take on it:
‘While [banks] remain important as the largest sector in the market…the extent of their weakness may not be repeated.
The market seems to have adjusted to the prospect of more limited growth. Competition looks to have picked up [and] increases in regulatory capital requirements are potentially dilutive to earnings per-share growth’.
For the most part, Citi’s forecast for the local stock market remains upbeat. But there are events to look out for in the near future which may derail global markets.
There are two big question marks in particular which could swing things one way or the other. The first of these concerns the outcome of Greece’s future in the Eurozone. A Grexit would spark panic among European markets, leading to massive sell-offs. And there’s no doubt the repercussions of this would spill over into global markets too.
The other problem for stocks is the issue of US interest rates. The US Federal Reserve is expected to make a decision on whether to raise rates as early as September. But that will depend on data showing that the fundamentals of US economy are improving. Consumer spending and unemployment will be key figures to watch here.
At some point, the US Fed will raise rates. They, like their counterparts in Europe and Japan, have no room to lower rates further. Unlike their counterparts, the Fed is willing to raise rates, but they’ll be desperate to point to signs of economic progress before pulling the trigger. But when they do, we may see a glut of investors running back to cash assets, as returns become more attractive.
Depending on how things shape out, cash may make a comeback in the World Wealth Report as early as next year.
Contributor, Markets and Money
PS: The recent banking sector sell-off was a blip that won’t be repeated this year. At least that’s what Citi expect. But the banking sector’s trouble could point to a much larger collapse.
Markets and Money’s Vern Gowdie doesn’t see eye to eye with Citi’s predictions. Vern is the award-winning Founder of the Gowdie Family Wealth advisory service. He’s been ranked as one of Australia’s Top 50 financial planners. He believes we’re set for a catastrophic crash in stocks in the future. And he thinks the ASX could lose as much as 90% of its $1.8 trillion market cap.
Vern wants to help you avoid the coming wealth destruction. That’s why He’s written ‘Five Fatal Stocks You Must Sell Now’. In this free report, he’ll show you which five blue chip Aussie companies could destroy your portfolio — and you almost certainly own one of them. To find out how to download the report, click here.