By Josephine Mason and Thyagaraju Adinarayan
LONDON (Reuters) - Cash is still king for investors heading into the summer slowdown.
Stashing cash started during the global rout across financial markets late last year as investors worried about a global economic recession.
Increasing a cash buffer is typical during times of economic and geopolitical strife.
But data and interviews with global wealth managers show that hoarding has continued at unusually high levels even as global stocks have rallied this year amid conflicting signals after the central banks' U-turns, mixed macroeconomic data and fresh tumult in Washington's spat with China.
The pan-European STOXX 600 and S&P 500 are up 11% and 12% respectively for the year to date.
However, many U.S. investors have still been lured by the outperformance of U.S. Treasury bonds compared with total returns in U.S. equities over the past six months.
Millionaires were hoarding as much as a third of their wealth in cash in March, up from less than a quarter at the end of last year, according to a client survey by UBS Asset Management.
UBS doesn't have historical data for global allocation, but Chief Executive Officer Sergio Ermotti described cash levels as astonishing and said in March U.S. holdings were at records.
Global funds on average allocated 6.4% of their portfolios to cash in the first quarter, the highest on records going back to 2013, according to Reuters' survey.
That level shrank to 5.2% last month, but it is still above historical levels, Reuters records show.
Graphic: Cash stash, click https://tmsnrt.rs/2M1CyUr
Reflecting the caution and uncertainty spreading across markets, most UBS clients said they were waiting to pounce on the next investment opportunity, holding cash as protection against a market downturn or keeping it for an emergency when asked what their rationale is for holding so much cash.
"One of the most common questions we get asked is 'when's the cycle going to end'," said James Mulford, Head of UK Mandates & Investment Content at UBS Global Wealth Management.
According to Morningstar data gathered for Reuters on more than 1,000 funds, net cash allocation has remained around 3% since late last year, above the historical average of 2.7%.
Interviews with wealth managers at Morgan Stanley, JPMorgan and HSBC confirm the trend.
"Cash has been running meaningfully above average among clients," said Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management. "Typically cash would be 5-6% of their assets. Now it's 3 to 4 times more."
Investors wonder how much longer this year's stock market rally can last as valuations look stretched and Q1 corporate earnings growth slowed, but they are also struggling to find alternative markets as government bond yields weaken.
"Clients are questioning if there is value in this market," said Shalett.
Holding cash will also stifle activity and further hurt income for banks, which are struggling with lower trading activity in general.
Late last month, UBS' Ermotti said the bank had seen some pick-up in client activity, but had previously described conditions as the toughest in years as revenues in its investment bank and wealth management fell.
SELL IN MAY?
So much cash on the sidelines undermines the idea posed by many analysts over the past month that investors have been too complacent about the headwinds, such as a breakdown in the U.S.-China trade talks, that could threaten the stock rally during the quieter summer months.
The summer months to the end of September are often the weakest stretch in the year.
Instead, investors were unusually cautious even before U.S. President Donald Trump sent shudders through financial markets earlier this month by reigniting his spat with Beijing.
"There's a lot of cash on the sidelines that tells us investors don't have conviction, but it also means they're not exposed so they won't be forced to sell," said Willem Sels, chief market strategist at HSBC Private Banking.
"That gives me some confidence that we won't see a big correction in equity markets."
While Treasuries have outperformed U.S. stocks over the past six months, the strategy may not pay off in the long term, UBS reckons.
The wealth manager expects a long-term annualized return of 7.8% for global stocks based on the MSCI All Country World Index, versus 2.8% for U.S. dollar cash, measured in 1- to 3-month Treasury notes.
But what could prise them out of their lethargy? Better economic and corporate data and an end to Trump's protectionist policies, asset managers say.
Until then, Christophe Donay, head of asset allocation at Pictet Wealth Management, said investors are stuck.
"Most investors are trapped in a prisoners dilemma. Whether to collaborate - follow the trend - or not collaborate. The optimal decision is do nothing," he said.
Graphic: US notes vs stocks, click https://tmsnrt.rs/2EvsXyZ
Graphic: US stocks and cash adjusted for inflation, click https://tmsnrt.rs/2YLY1lz
(Additional reporting by Saikat Chatterjee; Editing by Toby Chopra)