In this report, currency analysis excludes all cash equivalents, such as
bonds with less than one year to maturity and collateral cash held to
fulfill debt covenants. We believe that by excluding these items, we can
home in on the deployable cash in investment funds and assess the street’s
market sentiment. We then further analyze the liquidity of investment funds
on a cash and cash equivalents basis categorized by sector to help us
understand which verticals portfolio managers are currently overweighting
Average portfolio weights for world currencies
Chart 1 illustrates the mean cash percentage in Canadian investment funds
for nine major currencies in sequential order from January 2019 to March
2019. The U.S. dollar posted a 3.7% decline month-over-month decline for
the period ended March 31, 2019, while the Canadian dollar gained 5.1%.
Similarly, the Japanese yen (JPY) lost 35.2%, the euro (EUR) broke even,
the British pound (GBP) gained 110.2%, the Swiss franc (CHF) advanced
72.6%, the Australian dollar (AUD) dropped 32%, the New Zealand dollar
(NZD) gained 378.3%, and the Chinese yuan (CNY) was flat.
U.S. and Canadian cash on hand
Chart 2 illustrates the mean cash dollar value in sequential order from
January 2019 to March 2019. The U.S. dollar had a net position of
$3,444,208,867 for March 2019. The Canadian dollar had a net position of
$4,023,725,992 for March 2019.
It is evident now that the markets overreacted in the selloff during the
last few weeks of 2018. The S&P 500 Composite Index is at the brink of
breaking out to a record high above 3,000, and with the U.S. economy
growing at a strong 3.2% in the first quarter of 2019, it seems likely that
we will continue to see record-breaking performance in American stock
It is also evident from Graph 1 above that U.S. dollar deployment is on
the rise, and with some highly anticipated IPOs coming to market, we expect
further deployment in the coming quarters. Sector equity funds mandated to
invest in technology have long-time unicorn Uber in their crosshairs,
looking for a US$91.5 billion valuation. Lyft Inc., on the other hand, has
been in negative territory it debuted at the end of March. The U.S. Federal
Reserve continues its dovish stance, but with impressive growth data, the
probability of a hawkish turn is rising. Tariffs and import quotas on China
have helped slow down the “Made in China 2025” initiative.
Canadian markets have also performed well since the beginning of 2019. The
Bank of Canada has cited commodity price weakness as well as a housing
price slowdown in key urban markets as reasons for holding interest rates
steady in the coming months. The S&P/TSX Composite Index has not seen a
positive year since 2016, although there is some hope that rising
infrastructure spending and upward pressure on crude oil prices will
support the Canadian stock market in 2019.
The U.K. story remains the same, with some analysts arguing that the
British pound has entered oversold territory. The most interesting part of
the analysis is the turn of weighting in the Chinese yuan, partly due to
the rising 2019 growth estimates by the International Monetary Fund and the
improvement of trade tensions with the United States.
European Union cash is on the rise, as powerhouse Germany is expected to
see the weakest year since 2013, partly due to U.S. protectionist policy.
The GDP growth estimate was revised downward by 50% to 0.5% from 1.0%,
mostly due to manufacturing sector weakness.
Investment Fund Liquidity Ratio
The Investment Fund Liquidity Ratio is calculated as the amount of cash in
a fund relative to its total assets. It is important to assess this ratio
when analyzing investments and allocating capital. It has the power to give
incredible insight into the overall flow of capital into specific verticals
and the bullish or bearish sentiment in these investment categories. The
accompanying table shows the top and bottom 10 out of 54 applicable sectors
based on the mean ratio of over 3,000 investment funds with a mandate to
invest in the corresponding sectors.
The red highlights the sectors with the highest ratio, which translates
into underweighting their respective indices. This could mean that
portfolio managers are expecting negative performance in these categories.
The green highlights the sectors with the lowest ratio, which translates
into overweighting their respective indices. This could mean that portfolio
managers are expecting positive and alpha generating returns in these
categories, in the short term.
Q1 2019 Summary
Looking at our previous
Q4 2018 Liquidity Analysis Report
published in February, we find that Financial Services Equity was
significantly overweight at -1.36%. The
iShares S&P/TSX Capped Financials Index ETF (TSX: XFN)
returned 10.20% in the first quarter of 2019. The analysis demonstrates
that fund managers were able to forecast this sector efficiently.
In other sectors, we observe that crude oil’s recovery has contributed to
strength in the Commodity category, and Sector Equity has bounced back from
last December’s lows as the NASDAQ has recovered all its losses from the
last quarter of 2018.
Greater China Equity should be on everyone’s radar, too, as an increasing
number of ETF products focusing on Chinese technology and equity come to
Meanwhile, the real estate slump and downward revisions to EU growth have
led to underweighting in the Real Property category.
Nash Swamy is Junior Analyst, Analytics & Data, at
Fundata Canada Inc., a leading source for investment fund information.
He is involved in the classification of ETFs and risk ratings,
derivatives and warrants, and hedge fund data collection for liquidity
Questions regarding the above analysis can be directed to
Notes and Disclaimers
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