US investors have piled $1 trillion into cash during coronavirus lockdown, but UBS says rushing to the exits and abandoning the markets is not the answer

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• Money market holdings in the US has risen by $1 trillion to $4.7 trillion over the past eight weeks, UBS said in a note Tuesday. 
• During the great financial crisis, cash levels rose by under $500 billion, the Swiss bank said.
• The bank, however, advised investors against “running to the exits” by piling into cash and abandoning investments like stocks, saying that there is still money to be made in parts of the market, so long as you’re selective.
• “While rushing to the exits may feel like a safe choice for those uncomfortable with the rally or unresolved COVID-19 risks, we think there are several better alternatives to cash,” UBS Wealth Management CIO Mark Haefele said.
• UBS favors adopting a selective approach in equities, pointing to cyclical, stable and defensive stocks as options.
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Holdings in cash have surged in the US by more than $1 trillion over the past eight weeks, but investors should be investing in credit markets instead, according to UBS. 

In a research note published Tuesday, UBS noted that the total amount of cash in US money markets has grown by $1 trillion to $4.7 trillion in the space of eight weeks, a period that roughly coincides with the lockdown period in the US.

Money market funds generally aim to return investors exactly $1, never losing or really gaining value, and paying out only a very small return. They are considered one of the lowest risk investments available.

This is far greater than the surge seen during the entirety of the financial crisis, when money markets grew by less than $500 billion, UBS noted.

Read more: When Wade Pfau isn’t writing books or winning awards, he’s teaching Ph.D. students the art of retirement income. Here are 4 ways he says investors can reduce risk and thrive financially in the long term.

But despite the rising levels of cash in the US, UBS thinks “sitting in cash is not the answer.”

UBS said: “While rushing to the exits may feel like a safe choice for those uncomfortable with the rally or unresolved COVID-19 risks, we think there are several better alternatives to cash.”

Mark Haefele, chief investment officer at UBS Global Wealth Management, said: “With yields on savings and money market funds so low, we think investors will need to consider diversifying into riskier, higher-yielding assets such as lower-quality credit or stocks.”

Why UBS thinks credit markets are better

UBS Global Wealth Management laid out the parts of the market investors should look at.

“We currently see compelling opportunities in credit, which appears closer to pricing in our downside scenario than
equities, where there appears to be less margin for error,” UBS said. 

UBS thinks these better assets to invest in include US high yield credit, US investment grade credit, US dollar emerging market sovereign bonds, and green bonds. 

UBS also advised clients to: 

• Build long-term positions by combining averaging-in strategy with put strategy. 
• Adopt a selective approach in equities, with a particular focus on cyclical, stable and defensive stocks. 
• Focus on structural trends that accelerate as a result of COVID-19, such as e-commerce, fintech, automation, robotics and genetic therapies. 

Read more: These 22 well-known companies are vulnerable to acquisitions by private-equity buyers due to the coronavirus, BTIG says. 

UBS suggests investors can also take advantage of borrowing at low interest rates to meet cash short-falls in the interim. 

“Having sufficient liquidity to meet near-term spending needs is important for investors, and helps avoid the need to sell potentially high return assets at the wrong time,” UBS added. 

UBS’ mantra to invest in credit markets comes days after it said it is betting on the S&P 500 rising as much as 10% by the end of the year.