(The views expressed here are those of a columnist writer for Businesshala.)
LONDON, Sep 29 (Businesshala) – Cash may no longer be king, but it can still reign at times.
With central bank interest rates at historic lows over the past decade, most long-term investors have found “cash is garbage,” quickly burning a hole in their returns.
Meanwhile, G4 policy rates have been slashed to zero or below since the coronavirus crisis, thwarting some monetary normalization efforts.
The recovery of the pandemic as a bottleneck raises inflation and inflation expectations, fleeting or not, those all-cash rates have turned more deeply negative in real terms, making cash a lousy place at any size over the medium term Is.
And yet asset managers haven’t completely done away with some cash under the portfolio floorboard because it still provides the flexibility and liquidity to maneuver in choppy waters.
BlackRock’s strategists, for example, maintain a ‘neutral’ strategic weight in cash in a 6-12 month view to offset their modestly ‘pro-risk’ outlook – calling some “potential on any market turbulence”. “to add to the risk asset”.
And this is where boring old loss-making cash still plays a role, even if only temporarily in the short term.
The cash issue isn’t about its return, it’s about how you avoid losing your shirt on everything else, including a traditional shelter like government bonds.
Robeco’s annual five-year investment outlook this week is projected annual inflation in dollar terms at 2.25% from 2022 to 2026, with their expected dollar cash return of 1.0% giving an annual real loss of about 1.25%.
This negative real outlook also plays out for top-rated government bonds, making Robeco’s only inflation-busting projected returns through 2026 in equities, real estate, commodities, junk bonds and local emerging market debt.
As the market reconsiders the horizon for central bank rate hikes next year, historically expensive government and corporate bond prices and the most widely spread equity prices could face heavy revaluations and significant pullbacks.
Top-rated bonds have often been the “go to” buffer against stock market corrections. But many investors feel their extreme sub-zero real returns and high prices mean they embed one-sided risk that could well correlate or even drive any equity shakeout. .
Less volatile cash is simply less risky.
Morgan Stanley’s multi-asset strategist Andrew Sheets says cash returns are relatively low because it, by definition, has the lowest risk premium. And while riskier assets face turbulence — as they think they’re set to do in the final quarter and into 2022 — cash still works out month-to-month.
In short bursts, cash returns are relatively high with less risk. Sheets says that since 1959, US cash holdings have a 40% chance of outperforming the S&P500 in any given month, and one-in-three over any 6-month horizon.
“Investors should keep a higher-than-average allocation to cash,” he told clients, adding: “This argument is strongest versus assets in the US and emerging markets and weaker in Europe and Japan.”
“The flip side of cash being a boring, low-return asset is that it has an attractive risk profile that can help as a buffer against market volatility within a portfolio.”
Using estimates for the past 10 years of so-called “CVARs”, essentially averaging monthly losses beyond the ‘Value at Risk’ measures embedded in the implied volatility gauge, ranged from -0.1% to over 9% for equities. Cash shines with, at 1.7% for Treasuries and 4.9% for high-grade corporate bonds.
The implications for investors holding more cash than usual are significant, potentially exacerbating year-end volatility in the broader market and potentially biasing many for the dollar.
Bank of America’s monthly fund manager survey at the end of August had cash holdings at 4.2%, well below the 10-year average. But, perhaps towards the end of the third quarter, inflows tracked by the BoA saw the first weekly outflows from global equity funds last week and nearly $40 billion in cash flooded funds.
As markets fluctuate and the dollar picks up steam, this could force a fast-moving central bank to reconsider as a sign of tightening of hyper-lax monetary policy.
And if the dollar were to take off more quickly, it could itself act as a brake on rising commodity prices, creating so much inflation among monetary policymakers.
There might be a circular stabilizer, but not without a potential rest period where cash once again takes the crown.