Firm sounds market warning: Increase cash holdings, reduce portfolio risk

An increased correlation between asset classes, with fewer options for protection from price swings, is one reason for Societe Generale's bearish stance

By Bloomberg News

Jun 9, 2015 @ 10:48 am EST

In a cautionary note sent out this morning, analysts at Societe Generale are telling their clients to increase cash and reduce their holdings of both equities and bonds.

The firm now recommends that investors put 11% of their portfolio into cash, up 4% from its previous level. This comes as worries mount over just how much further the bull market can run. One big reason for Societe Generale's change in outlook is the growing difficulty in diversifying investors' portfolios given the increased correlation between asset classes. This is a concern others have raised as there are fewer options for investors to protect themselves from price swings.

"Correlations have significantly increased between asset classes and it therefore becomes difficult to naturally protect portfolios through asset class diversification: for the first time in a long time we recommend raising the cash allocation (+4 point to 11%) to better manage portfolio risk."

The team isn't just recommending cutting equity allocation, but bonds as well.

"We reduce our equity and bond allocation by 2 points (to respectively 45% and 36%). To enhance risk diversification, we upgrade our weightings in alternative investments (now 8%), including commodities (up 3 points)."

The note also cites worries about liquidity, which have increased substantially in recent months. The firm expects liquidity in the market to fall even further as a results of tighter regulations and tightening at the U.S. central bank. This also brought about worries of policy errors by the Fed, as this type of substantial quantitative easing (QE) program has never been seen before. This appears to be the main reason they reduced their recommended allocation to U.S. Treasuries.

And inflation is finally expected to tick up, the team said leading them to increase their allocation to commodities for the first time in a number of years. They also said investors should take a closer look at moving their assets from expensive U.S. equities to cheaper Chinese equity markets (the ones that global investors can take part in) as well as the euro area.

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