Sitting on the sidelines for too long comes with a personal
price tag
TORONTO, Jan. 26, 2016 /CNW/ - Canadians are holding
a record $75 billion in extra cash
and continue to sock away money at a rate not seen in more than
four years, finds a new CIBC World Markets report.
The report finds Canadians, nervous of volatility in the
financial markets, have amassed cash reserves of $75 billion as of December
2015 -- extra money that they normally would invest in
the markets, which could cost them billions in lost investment
returns.
"We are currently witnessing the creation of personal cash
buffers larger than at any other time on record," says Benjamin Tal, Deputy Chief Economist at CIBC
World Markets and co-author of the report Chasing In On Fear
with Senior Economist Royce Mendes.
"From a broader perspective, the Canadian economy is losing out
because capital is not being allocated efficiently."
Since the 2008 global financial crisis, excess cash reserves
held by Canadians have risen notably and at the current
level of $75 billion, they represent almost 10
per cent of the total value of overall personal liquid assets in
Canada.
In the past year alone, cash positions are estimated to have
risen more than 11 per cent – the fastest pace since early
2012.
An overly sour view of Canada
from foreign investors combined with recent volatility in stock
markets around the world has made for a tough investing
environment, the report says.
"Consistent with past behaviour, Canadian investors have used
current market volatility as an excuse to let cash pile up in their
chequing and savings accounts, says Mr. Tal.
The report finds that all Canadians, young and old alike, are
making cash a bigger part of their portfolios. But, strikingly,
those under 35 – the farthest away from retirement -- are holding
twice as much cash as those over the age of 65, about 33 per
cent versus 15 per cent.
"While holding cash can guard against short-term spikes in
volatility, it's certainly a long-term drag on portfolio returns,"
says Mr. Tal.
While the October 1987 stock
market correction lasted two months, investors added to their cash
position for 18 months following the crash, during which time the
stock market rallied more than 20 per cent. Following the 2001
flight to safety, overall liquidity positions surged by more than
30 per cent, but again, investors failed to adjust their cash
levels when the market recovered, maintaining record high cash
levels during the bull market that began in early 2003.
"While the rush to cash during periods of volatility is
understandable, the problem is that Canadians maintained those
elevated cash positions for far too long after markets rebounded,"
says Mr. Tal.
Likewise, the current rush to cash is still building on cash
holdings that spiked following the 2008 market crash.
"What's more troubling than holding cash for long periods of
time is that investors often move into it at precisely the wrong
time," says Mr. Tal. "The usual response is to take money off the
table at the worst possible time."
Over the past five years, the S&P/TSX Volatility Index, a
gauge of investors' fear, peaked over 20 eight times, yet in the 90
days following the peaks, the S&P/TSX Composite Index returned
an average of 9 per cent.
"We know that from the data on personal deposits that Canadians
respond to adverse shocks by moving into cash," says Mr. Tal. "But,
that rebalancing means that investors are buying high and selling
low."
The complete CIBC World Markets report is available at:
http://research.cibcwm.com/economic_public/download/if_2016-0126.pdf.
About CIBC
CIBC is a leading Canadian-based financial institution with 11
million individual, small business, commercial, corporate and
institutional clients and three major business units – Retail and
Business Banking, Wealth Management and Capital Markets. CIBC
Capital Markets provides integrated global markets products and
services, corporate and investment banking, and top-ranked research
to corporate, government and institutional clients around the
world. Visit www.cibccm.com for more information on CIBC and CIBC
Capital Markets. News releases are available at
www.cibc.com/ca/media-centre/.
SOURCE Canadian Imperial Bank of Commerce