By Mike Dolan
LONDON- Cash may no longer be king, but it can still rule sometimes.
With central bank interest rates at historic lows for much of the past decade, most long-term investors have found “cash is trash”, quickly burning a hole in their returns.
Meanwhile, policy rates of the G4 have been floored to near zero or below since the coronavirus crisis hit, scuppering attempts at some monetary normalization.
As a bottlenecked pandemic recovery stokes inflation and inflation expectations, transitory or not, those cash rates have all sunk more deeply negative in real terms, making cash a lousy place to be in any size over the medium term.
And yet asset managers have not completely dispensed with some cash under the portfolio floorboards as it still offers flexibility and liquidity to manoeuvre in choppy waters.
BlackRock strategists, for example, retain a ‘neutral’ tactical weight in cash over a 6-12 month view to offset their moderately ‘pro-risk’ view – keeping some to “potentially further add to risk assets on any market turbulence.”
And this is where boring old loss-making cash still has a role, even if only temporarily in the short term.
The case for cash is not about its return, it is about how you avoid losing your shirt on everything else, including traditional havens like government bonds.
Robeco’s annual five-year investment outlook this week is that with projected annualized inflation in dollar terms from 2022 to 2026 estimated at 2.25 percent, their expected dollar cash return of 1.0 percent gives an annualized real loss of some 1.25 percent.
That negative real outlook plays out for top-rated government bonds too, leaving Robeco’s only inflation-busting projected returns through 2026 in equity, real estate, commodities, junk bonds and local emerging market debt.
As markets rethink central bank rate hike horizons into next year, historically expensive government and corporate bond prices and the most-stretched equity prices may face a hefty re-pricing and significant pullback.
Top-rated bonds have often been the “go to” buffer against stock market corrections. But many investors feel their extreme sub-zero real yields and elevated prices mean they embed one-way risk that may well correlate or even drive any equity shakeout. – Reuters
