Forget the stock rally, investors are holding cash

Momentum has been bullish for awhile: Strategist
Momentum has been bullish for awhile: Strategist

More and more investors are starting to hoard cash thanks to an ultra-low interest rate environment and negative bond yields.

While the current run in the global equity markets has seen some investors enjoying the highs, there are still a number of investors who prefer to hold on to cash or invest in other alternative forms of investment.

A survey conducted by Bank of America Merrill Lynch last month found that cash levels were at 5.8 percent of portfolios and at the highest levels since November 2001.

"Globally, sentiment remains weak. Global asset allocators are holding the highest average cash balance since November 2001, while equity allocations have dropped to four-year lows," BAML said in a note.

Cash vs equities?

A further piece of research from Wealth-X Billionaire Census showed that the world's billionaires are holding more than $1.7 trillion in cash. The report said that billionaires are taking money off the table where available, while uncertainties in the economy and the historical highs found in deals have resulted in cash-flush portfolios.

"Holding cash is surely a bad sign for investor confidence but it is perfectly rational," Alastair Winter, chief economist at Daniel Stewart told CNBC via email.

"Equity and bond prices are largely being propelled by central banks both directly through their loose monetary policies and indirectly by market expectations that those policies will be maintained indefinitely. Holding cash is a trend currently but a rapid pick-up in inflation would make many investors uneasy about that too."

Traditional forms of investment such as bonds have seen their yields at record lows due the current market uncertainty post the U.K.'s vote to leave the European Union. The uncertainty has also led to volatility and fluctuations in the forex and equity markets which means investors need to be very smart when putting their money into these forms of investments.

The Dow, the S&P and Nasdaq posted record highs for the first time since 1999 amid investors eyeing rising oil prices and strong second-quarter results from earnings giant Macy's and Kohl's. The sentiment in the Wall Street quickly saw Asian stocks rally on Friday but couldn't continue on to Europe that saw mixed performance from indices.

But with global stocks rallying at these levels, the big question is if this sentiment is sustainable.

"I think the momentum has been bullish for a while and that should probably continue at least for a very short term," Sandy Jadeja, chief market strategist at SignalPro told CNBC on Friday.

"Technical data shows that the divergence pattern is coming up and the strength will not sustain itself for too long."

Photographer | Collection | Getty Images

So back to pots of cash then? One analyst told CNBC via email that investors opting to hold cash rather than invest in equities at a time when equities are performing well is a sign that confidence in the market to sustain the run is deteriorating.

"It's one of the early signs that a market is looking overextended as moves are simply not being backed up with volume. Given where markets currently are, the time of year and the growing number of downside risks for investors, it's not a huge surprise that we're seeing more conservatism," Craig Erlam, senior Market Analyst at OANDA said.

Erlam also explained that rising cash positions doesn't necessarily mean the market has topped or that we are going to see a sell-off correction. "It is just an indication that investors are currently becoming less comfortable at these levels in the current environment."

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