After an incredible few months on the share market, I'm sure many an ASX investor is feeling flush right now. The S&P/ASX 200 Index (ASX: XJO) is up more than 33% since bottoming out on 23 March. That represents a lot of ASX 200 shares that have given investors impressive gains over the last 5 or so months.
And for some ASX shares, it's an even better story. Afterpay Ltd (ASX: APT) shares are still up more than 800% since 23 March, despite this week's heavy selling. It's a similar story with Zip Co Ltd (ASX: Z1P), Marley Spoon AG (ASX: MMM) and Sezzle Inc (ASX: SZL).
But now we are putting some of these (frankly) sometimes ridiculous gains in the rear-view mirror, I'm sure there are many investors wondering 'what's next'. After all, we investors are trained to be ever-wary of good times turning sour in a rapid fashion. And there's never an investor who feels more vulnerable than one sitting on a triple-digit profit margin after just a few months.
Of course, there's nothing to indicate that markets are today in any danger of a crash in the near-term future. The ASX 200 is (at the time of writing) up a healthy 1.7% to 6,057 points, pretty standard.
But one piece of news has caught my eye this week, and I think it doesn't bode too well for investors.
Enter the Future Fund
The Future Fund is Australia's national sovereign wealth fund that was initially set up in 2006 by the then-government of John Howard. It was established to help fund the federal government's payment of Commonwealth superannuation liabilities. Today, it manages $161 billion worth of assets, which are invested in a range of asset classes including cash, foreign currencies, bonds, shares and unlisted assets such as infrastructure.
According to reporting in the Australian Financial Review (AFR), the Future Fund has turned bearish on global share markets. That's the conclusion I'm drawing from the fund's decision to increase its cash position from 9.6% to 17% of its total asset allocation over the quarter ending 30 June 2020, anyway.
Further evidence for this bold claim? Well, the AFR reports that Future Fund chief executive Raphael Arndt had this to say on the growing cash position:
We don't feel any pressure to deploy that liquidity… There is not a lot of distress baked into asset pricing, but there's certainly the potential for that to emerge as the stimulus is pulled back over the next year or so… And that's why we think we're much better off being positioned in a cautious way right now.
To me, this statement reads 'shares are looking overvalued and we think there's a significant chance they will be a lot cheaper sometime in the next year'. In other words, the Future Fund is positioning itself for another share market crash, or something close to it.
Cash is king?
So should ASX investors take this hint and start stockpiling cash? Well, yes and no in my opinion. I do think now is the time to start building a modest cash position out in your investment portfolio if you haven't done so already – perhaps a 10% or 20% allocation. The gains we have seen over the last 5 or so months are unlikely to be repeated over the next 5 months, at least in my opinion.
But I'm also not advocating investors sell everything and go underground. There's a difference between hedging your portfolio's risk exposure with cash and trying to time the markets with everything you've got. Everyone has different volatility tolerances, but if you're one of those investors who can't stomach a market drop, remember, it's usually too late to take money off the table during a market crash.
