With global outlook grim, cash 'safer' than equities

Cash is once again king. Amid a deteriorating global economy, private banks and wealth managers are warning clients to stay away from equities, forecasting that more risks are on the horizon.

Hong Kong stocks are now firmly in bear-market territory, with the Hang Seng Index losing almost 25 per cent since the start of the year. A downturn of more than 20 per cent in a market over at least a two-month period is considered an entry to a bear market. Masses of investors are now seeking redemptions from equity funds.

Emerging-markets equity funds carried a nine-week US$20.6 billion outflow streak into the third quarter, according to US-based research company EPFR. Redemptions from emerging-markets bond funds meantime set a weekly record, exceeding US$3 billion.

'We have been advising clients to lower their risk exposure since early August when it became more obvious to us that the EU debt crisis was intensifying,' said Stephen Corry, head of Asia-Pacific investment strategy for LGT (Hong Kong).

Corry said global equity valuations were cheap and sentiment was weak, a combination that would normally make fund managers more upbeat. 'But until we see a more credible resolution to the EU debt crisis, we are likely to stay on the sidelines for the time being based on current valuation.'

Analysts have all downgraded their forecasts for economic growth, saying the risks of recession are higher and economic recovery will remain lacklustre in coming years.

What is more, faster-growing emerging economies in Asia have not translated into outstanding equity performance. While the Standard & Poor's 500 Index has lost 8.69 per cent so far this year, the MSCI Asia Pacific Index dropped 15.76 per cent.