Investors Shift from Cash to Stocks and Bonds

By Davide Barbuscia

NEW YORK (Reuters) – Investors are expected to increase their allocations to stocks and bonds from cash following moderate Federal Reserve interest rate cuts, according to BlackRock's CFO, Martin Small, at the Goldman Sachs U.S. Financial Services conference.

Earlier this year, expectations of aggressive interest rate cuts by the U.S. central bank have moderated due to the strong momentum of the U.S. economy despite high borrowing costs. "Even modest rate cuts are going to fuel a very healthy amount of investor re-risking," Small noted.

Lower interest rates are anticipated to reduce yields in money markets, currently standing above 4% with instruments like T-bills. However, little evidence shows investors are moving away from cash, with U.S. money market assets rising to $6.77 trillion from $6.3 trillion since early September.

Small attributed this to ongoing political and economic uncertainty, making cash a safe haven for clients. He mentioned that market expectations for rate cuts have become shallower, keeping money market fund balances stable.

The U.S. central bank initiated interest rate cuts in September by 50 basis points, followed by a 25 basis point reduction last month. Investors are now anticipating an additional quarter percentage point cut this month, but further easing will depend on economic and inflation trends.

Predictions indicate interest rates may settle at about 3.7% by the end of next year, reflecting a 90 basis point increase compared to September pricing. Despite this, Small remarked that cash-favoring investors are lagging behind traditional portfolios combining equities and bonds.

He commented that the potential for underperformance might lead to a growing trend of re-risking among investors. Furthermore, BlackRock's bond exchange-traded funds have experienced strong inflows this year, signaling a shift towards more normalized allocations in fixed income.