With interest rates expected to decline amid falling inflation and slowing growth, the appeal of high cash rates should be re-evaluated. Historically, multi-asset portfolios delivered three times the return on cash on average in both low and high interest rate periods. We highlight three reasons why it is important to deploy cash today.
1. Returns on cash have been low compared to other asset classes
Broad markets indeed outperformed cash in 2023. Cash return of around 5% may appear attractive when compared to the historical cash returns in the period between the Global Financial Crisis and the COVID recession. But the real opportunity cost of cash stems from its relative performance compared to other assets, and these have been substantially higher in 2023. Moreover, with the consumer prices rising around 3.5% in 2023, these nominal returns translate to only 1.5% real return for cash.
As cash rates are the fundamental building block for all asset class returns, an increase in cash rates lifts the total long-term expected returns across all markets: stocks, bonds, and alternatives. Furthermore, the risk premia for government bonds and equity markets increased in 2023, boosting their potential for outperformance in the future. It is important that investors should not evaluate investment opportunities (such as cash) in isolation but against alternative opportunities, and to consider the prospective real returns rather than nominal only.
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Based on the information provided, it seems that the article is discussing the appeal of high cash rates in the context of declining interest rates and slowing growth. The article highlights three reasons why it is important to deploy cash today. It mentions that returns on cash have been low compared to other asset classes, and that the real opportunity cost of cash stems from its relative performance compared to other assets. It also emphasizes the importance of evaluating investment opportunities, such as cash, in comparison to alternative opportunities and considering prospective real returns rather than nominal returns.
To provide more information on the concepts used in the article, let's explore each one in more detail:
Returns on Cash Compared to Other Asset Classes
The article mentions that broad markets have outperformed cash in 2023, and that the real opportunity cost of cash comes from its relative performance compared to other assets. It states that the nominal returns on cash in 2023 were around 5%, but when considering the consumer price inflation of 3.5%, the real return for cash was only 1.5%. This suggests that the returns on cash have been low compared to other asset classes [[1]].
Importance of Evaluating Investment Opportunities
The article emphasizes the importance of evaluating investment opportunities, such as cash, in comparison to alternative opportunities. It suggests that investors should not evaluate investment opportunities in isolation, but rather consider them against alternative opportunities. This means comparing the potential returns and risks of different asset classes, such as stocks, bonds, and alternatives, to make informed investment decisions [[1]].
Prospective Real Returns vs. Nominal Returns
The article highlights the importance of considering prospective real returns rather than nominal returns. Nominal returns refer to the returns on an investment without adjusting for inflation, while real returns take into account the impact of inflation. In the case of cash, the article mentions that the nominal returns in 2023 were around 5%, but when adjusted for consumer price inflation of 3.5%, the real return for cash was only 1.5%. This suggests that investors should consider the impact of inflation on their investment returns to get a more accurate picture of their purchasing power [[1]].
In summary, the article discusses the appeal of high cash rates in the context of declining interest rates and slowing growth. It highlights the importance of evaluating investment opportunities, considering prospective real returns, and comparing the performance of cash to other asset classes. By considering these factors, investors can make more informed decisions about deploying their cash.
