Investors were getting increasingly nervous as US election results trickled in, with emerging-market stocks perhaps the biggest losers in the case of a Donald Trump victory.Any selloff is likely to be short-lived, however. Equally, another rally should Hillary Clinton prevail would be unlikely to last long. The reasons are straightforward: There’s too much cash out there, and it’s the end of the year.
With the increased uncertainty about the election, some of the biggest funds have been boosting their cash holdings. Bank of America Merrill Lynch’s latest survey of 171 funds holding assets of $443 billion, conducted between Oct. 7 and Oct. 13, showed the highest level of cash since the days after the Sept. 11, 2001 attacks.
Average mutual fund cash holding 5.8%
That’s fear embodied. The issue, though, is that fund managers can’t afford to be seen holding an average of 5.8 percent of their money in cash when the year-end reporting period starts — they’re paid to invest, not to hold deposits. So invest they must, and must do so before the second week of December, when liquidity goes on vacation and adding holdings becomes near-impossible.
This means that if there’s a sudden drop in stocks, it will be followed by fund managers cheerfully putting their cash back into the market. It also means that a Hillary Clinton victory would send a signal to start buying right away.
Where do emerging markets stand in that global equation? Well, the BofA Merrill survey also indicated that managers haven’t been this overweight stocks in the developing world since early 2013. On average, they held 31 percent more shares exposed to emerging economies than was mandated by the indexes they follow.
Besides, the asset class is perhaps the one that will react most violently to the outcome, given the trade rhetoric expressed by both candidates.
In other words, expect emerging equities to hurt the most if Trump wins. Which also means they’ll be among the most underpriced and attractive assets in the aftermath. While in a sudden rally, all these excessively exposed funds will take profits to show healthy gains come December.
Ultimately, then, everything is likely to go more or less back where it was. First, get ready for more jolts.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.