Societe Generale: It's Time to Increase Cash and Reduce Your Risk

Another warning

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Maybe time to back away from the action

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In a note out this morning, analysts at Societe Generale are telling their clients to increase cash and reduce their holdings of both equities and bonds. 

The firm now recommends you put 11 percent of your portfolio into cash, up 4 percent from its previous level. This comes as worries mount over just how much further the bull market can run. One big reason for Societe Generale's change, is the growing difficulty in diversifying your portfolio given the increased correlation between asset classes. This is a concern others have raised as there are fewer options for investors to protect themselves from price swings.  

Correlations have significantly increased between asset classes and it therefore becomes difficult to naturally protect portfolios through asset class diversification: for the first time in a long time we recommend raising the cash allocation (+4 point to 11%) to better manage portfolio risk.

The team isn't just recommending cutting equity allocation, but bonds as well. 

We reduce our equity and bond allocation by 2 points (to respectively 45% and 36%). To enhance risk diversification, we upgrade our weightings in alternative investments (now 8%), including commodities (up 3 points).

The note also cites worries about liquidity, which have increased substantially in recent months. The firm expects liquidity in the market to fall even further as a results of more stringent regulations and tightening at by the U.S. central bank. This has also generated concerns about policy errors by the Fed, as this type of substantial QE program has never been seen before. This appears to be the main reason SocGen's analysts reduced their recommended allocation to U.S. Treasuries. 

And inflation is finally expected to tick up, the team said, leading them to increase their allocation to commodities for the first time in a number of years. They also said investors should take a closer look at moving their assets from expensive U.S. equities to cheaper Chinese stock markets (that global investors can take part in) as well as the euro area. 

Here's a graphic from the note summing up the firm's expectations as well as its overall investment strategy. 

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