Principal AM’s Seema Shah: Money market surge poised to fuel risk asset rally

A record $5.7trn has been amassed

Seema Shah
Seema Shah

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Investors have poured cash into money market funds over the past two years as higher interest rates made them considerably more attractive than they had been for a long time.

This has resulted in a record $5.7trn being amassed, much of which will at some point find its way into stocks again.

Principal Asset Management’s chief global strategist Seema Shah sees this as a potential catalyst for a strong market rally in 2024, and said investors should “get ready”.

“As an economic downturn quickly comes and goes, conditions stabilise, and the Federal Reserve potentially reduces rates in the year ahead, this substantial pool of cash is poised to fuel a significant rally in risk assets, offering investors an opportunity to potentially capitalise on improved sentiment and market dynamics,” Shah said in a commentary note.

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Shah noted that economic conditions over recent years have created the perfect environment for money market funds, with the Covid outbreak, lockdowns and resulting concerns about the U.S. economy driving a spike in safe haven flows.

Investor interest in these funds was maintained as the subsequent surge in inflation and aggressive Federal Reserve response moved yields sharply higher.

This sentiment was stoked even further by the regional banking crisis in the US, which sparked another flight to safety.

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The situation has changed recently, Shah noted, but even as banking sector concerns have eased inflows have persisted due to the ‘higher-for-longer’ rates narrative, as well as ongoing economic uncertainty.

“2024 should see many of the concerns and questions of recent years finally resolved,” Shah said. “The long-awaited economic downturn should arrive and depart without leaving much destruction, and inflation should continue to decelerate.”

“Most importantly, the Fed is likely to open the door to rate cuts, reducing the attractiveness of cash.”

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