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Dethroned cash can still rule in stressful times By Reuters


© Reuters. This picture illustrates the Dollar, Euro, and Pound banknotes. It was taken on April 28, 2017. REUTERS/Dado Ruvic/Illustration

By Mike Dolan

LONDON (Reuters) – Cash may no longer be king, but it can still rule sometimes.

Most long-term investors feel that “cash” is a waste, and have been unable to make a return due to historically low central bank interest rate for the past decade.

Since the outbreak of coronavirus, the G4 policy rates have been at or near zero since then, which has hampered any attempts to normalize monetary conditions.

Because a slowing pandemic recovery fuels inflation and inflation expectations (transitory or not), those cash rates have all fallen more seriously in real terms. This has made cash an unattractive place in the medium-term.

But asset managers are not done with cash. Cash still provides flexibility and liquidity for maneuvering in turbulent markets.

For example, BlackRock’s (NYSE:) strategists keep a neutral tactical weight of cash for a 6–12 month period to balance their moderately pro-risk view. Some are also kept to help “potentially further increase risk assets” in times of market turmoil.

This is why boring, loss-making cash can still play a part in today’s market turmoil.

Cash isn’t about the return. It is all about how to avoid spending your money on other things, such as traditional safe havens, like government bonds.

Robeco has released its annual five year investment outlook. With projected inflation in dollars from 2022-2026 at 2.25 percent, the expected annual dollar cash return is 1.0%. This results in a loss of approximately 1.25% annually.

This negative outlook also applies to top-rated government bonds. Robeco has no inflation-busting projections through 2026 for equity, commodities, junk bonds, local emerging markets debt, and real estate.

Markets will likely reassess their central bank rate hike plans for next year. This could lead to a significant repricing of historically high equity and corporate bonds prices, as well as significant pullbacks in the stock market.

The “go-to” protection against market corrections has been top-rated bonds. Many investors believe that their sub-zero yields and high prices are a one-way risk. This could be correlated with or drive equity shakeouts.

It is safer to have less volatile cash than it is.


Morgan Stanley (NYSE:)’s multi-asset strategist Andrew Sheets says cash returns relatively little because it has, by definition, the lowest risk premium. Even when assets with higher risk are experiencing turbulence (as they appear to be in the fourth quarter of 2018 and beyond 2022), cash functions every month.

Short bursts of cash return more quickly and with less risk. Sheets says that since 1959, the probability of U.S. cash holdings outperforming the in any month is 40% and one-in-three over any 6 month horizon.

He stated that investors should have a higher than average cash allocation. This argument was stronger against assets in the U.S., Emerging Markets and Japan.

Cash is boring and low-return, but it also has an appealing risk profile that can be used to buffer portfolio volatility.

The “cVaR” is the cumulative monthly loss above the assumed Value at Risk measures in implied volatility gauges. Cash shines at -0.1%, compared with more than 9 % for equities and 1.7% for Treasuries. It also has 4.9% for corporate bonds of high quality.

These implications are likely to increase yearend market pullbacks and possibly bias investors towards the dollar by having higher amounts of cash.

Bank of America (NYSE) reported that in late August its monthly fund manager survey found cash holdings of 4.2%. This is significantly lower than the 10-year average. Perhaps with the final quarter over, BoA’s monthly fund manager survey in August showed that cash holdings were at 4.2%. This is well below the 10-year average.

It is possible that markets will wobble as the dollar rises, which could lead to a reconsideration of increasingly hawkish central banking signals about tightening ultra-loose monetary policy.

If the dollar rose more quickly, it could act to stop the kind of commodities price rises that cause so much anxiety among monetary policymakers.

Perhaps a circular stabilizer, perhaps. But not without an potentially restive period in which cash once more holds the crown.

(by Mike Dolan. Twitter: @reutersMikeD. Edited by Alexander Smith