A recent study from CIBC found that Canadians are hoarding a record $75 billion in cash supposedly because they’re nervous about investing in the markets.
The bank warned that stashing cash in their mattresses could cost households billions in lost investment returns.
But Bank of Montreal chief economist Doug Porter sees it differently. “Being overweight cash over the past year perhaps indicates an amazing degree of shrewdness among Canadian investors,” he wrote in a client note this week.
CIBC estimates that Canadians are hoarding an excess $75 billion in cash. (Chart: CIBC)
Why does Porter believe that? Stocks on the Toronto market are down nearly 2 per cent since the start of the year, and down more than 12 per cent since last February.
If you’re holding cash, you’re up 12 per cent against Canadian stocks over the past year, and up 2 per cent just since the start of January.
What’s more, Porter argues that Canadians’ cash hoard doesn’t actually show people are bailing on equities. The percentage of household assets held in equities and mutual funds was 36.3 per cent in the latest quarter for which there is data, slightly higher than the long-run average of 34.6 per cent, Porter noted. Canadians actually have more money in equities today than they usually do.
“So please spare us the scolding, and trust that the majority of Canadians are doing what is sensible for their personal situation,” Porter concluded.
If households really are holding onto cash out of fear of the markets, they’re simply following the advice of some of the most prominent investors out there.
“Cash or better yet 'near cash' such as one- to two-year corporate bonds are my best idea of appropriate risks/reward investments,” money manager Bill Gross, co-founder of PIMCO, told clients last fall.
Gross was specifically talking about the lack of returns on investment in a world with perpetually low interest rates, and he was writing in the wake of the Chinese stock market crash last summer.
BMO’s Porter also noted that returns on investments aren’t that great these days.
“The opportunity cost of holding cash versus locking into a term instrument is quite low right now,” he wrote.
In other words, people aren’t losing much by not investing.