* Julius Baer research chief says wealthy "in denial"
* Marc Faber says cash as risky as equities
By Claire Milhench
FRANKFURT, Oct 23 (Reuters) - Wealthy investors still holding large quantities of cash and gold risk missing out on returns as the equities rally has further to go, said senior delegates at the CFA Institute's European Investment Conference.
"When we are in the easing part of a credit cycle investors should be buying equities but this is not happening -- investors seem to be lingering in a valley of fear. They are in denial about what is happening," said Christian Gattiker-Ericsson, head of research at Julius Baer.
Swiss bankers attending the conference confirmed high net worth clients still had large portions of their portfolios in cash or physical gold, while Reuters polls for September showed cash holdings among their institutional peers had fallen back sharply from their credit crisis peaks.
Burkhard Varnholt, chief investment officer at Swiss private bank Sarasin said rich investors feel paralysed.
"Clients all want to know if the recovery has been too fast and gone too far, because they are all hoping it will (fall) back 10 percent then they can buy in.
"The majority are still more exposed to cash and fixed income than they have been for many years, and that is creating a sense of desperation," he said.
Sarasin is overweight equities and emerging markets in its portfolios, believing the rally will continue for another six to eight months, with 20-30 percent upside in real assets.
"The next part of the rally will be in high quality, growth businesses. This will be driven in part by emerging markets, but that will benefit companies like Nestle, Coca-Cola and Unilever as well," he said.
UPSIDE
Julius Baer's Gattiker said improvements in balance sheets were partly reflected in credit spreads, but equities still lagged the credit markets and did not fully reflect the surge in corporate bonds.
He said correlations between high yield bond spreads and equities implied further upside in the S&P 500, and of as much as 50 percent among financials, although he expected it will be more likely about 20-30 percent.
He preferred equities to quality investment grade bonds, believing these to be getting too pricey, highlighting small caps, value stocks, high beta stocks and early cycle sectors as key investments in the recovery phase.
Gattiker's analysis echoed that of Dr Marc Faber, editor of the Gloom, Boom & Doom report. He was critical of the Federal Reserve's quantitative easing policy because of the increased likelihood of asset price bubbles, but given such a policy he said it made no sense for investors to sit on cash.
"To hold cash today is as risky as holding equities, commodities or real estate because you risk losing out on asset price appreciation or losing your purchasing power through inflation," he said.
Instead of holding government bonds and cash -- the safe havens to which investors fled in the fourth quarter of 2008 -- they should now be buying equities and commodities, Faber said. He said the 20-year-lows reached by some Asian equity markets in late 2008 provided a good entry point given long-term trends.
He recommend that investors allocate at least 50 percent of their portfolios to emerging markets. (Editing by Rupert Winchester)