Good time to begin to get out of cash and invest, say strategists

INVESTORS should begin to consider moving out of the safety of cash, either into fixed income or equity investments, say strategists.

This is because once the US Federal Reserve begins to reduce interest rates – it has indicated three cuts this year – the speed at which cash rates fall is likely to be rapid.

Around US$9 trillion is invested in money market funds globally. For the US, where data on fund flows is more easily available, assets in money market funds declined by about US$60.9 billion in the week ended Mar 20, to US$6.05 trillion.

Based on data from the Investment Company Institute (ICI), the decline is in institutional money market funds, which fell by US$71 billion. Retail money market funds grew by US$9 billion.

Singapore savers continue to show keen interest in lower-risk options, which incur reinvestment risk as rates may be lower at maturity. The latest six-month Treasury bill auction attracted S$14.4 billion in applications for the S$6.3 billion on offer. The cut-off yield was 3.78 per cent.

Based on market indices, the yield on investment grade US corporate bonds currently exceeds 5 per cent. The yield on 10-year Treasuries stands at around 4.24 per cent, and emerging market debt is yielding over 7 per cent.

Karen Ward, JP Morgan Asset Management chief market strategist for EMEA, said: “Over the long term, cash is never a good idea. But even in the short term, cash doesn’t look like the right choice to me. If the economy is fine, you’re better off in stocks.

“Central banks will be taking those cash rates down, and when that happens, it usually happens quickly. There hasn’t been an instance in history where, after peak rates, you would have been better off in cash.”

Ward was speaking during the firm’s recent investment conference in London.

The global economy is set to accelerate, she said. “In every state of the world, in almost all scenarios this year, cash would not be the best use of your money. We’re talking a lot to clients about where to deploy that cash, whether they’re worried about the future or not. I do think that the US 10-year (Treasury) and global interest rates have reset to the more normal levels. Now we’ve got a healthy and attractive bond market to invest in.”

Inflation, she added, is the biggest driver for both stocks and bonds.

“But inflationary pressures have eased significantly. We can’t be complacent; we’re still watching the inflation story very carefully. But we are way down from where we were previously. And if inflation is somewhere between 2 and 3 per cent, that’s good enough. It’s really good news for consumers.”

Harry Phinney, Capital Group investment director for fixed income, said fundamentals are supportive of an allocation to a broad fixed-income portfolio and even emerging markets.

“Given the fact that yields are as high as they are at the moment, if you have a three- or five-year horizon going forward, we don’t think you’ve missed the market. We think that generally speaking, returns can be quite positive. Even in accounting for the potential risk of recession, the longer-term fundamentals still remain relatively good across a broad swath of the market.”

Phinney added that core bonds still look attractive and offer diversification benefits to equity.

“If you think we’re in for potentially higher-for-longer inflation, short-dated bonds offer some pretty nice yield. We do think they’re a good alternative to some of the cash allocations that we’re seeing with clients. Now is a good time to consider getting off the sidelines.”

Capital Group investment director for equities Andy Budden, meanwhile, expects equities to outperform cash and fixed income when interest rates begin to decline. Earnings growth is expected to be in double digits over three to five years. The tricky question, he said, is valuations. In the year to date, the S&P 500 has returned 9 per cent, and 33 per cent over 12 months.

“The headline valuations for US equities are quite high by historic average standards, and also quite high based on where interest rates are. But valuations in the rest of the world are either at their historic average or below average,” he said. Strong returns in 2023, he added, basically filled the hole created by losses in 2022.

Budden cited a number of secular trends that could provide fresh wind to markets. One was the biopharma sector, where innovation is manifest in things such as obesity drugs and new cancer therapies.

He also gave a nod to developments in generative artificial intelligence (AI), but was also cautious. “It’s very, very difficult to invest in. One of the reasons is that we can’t size the market… So you have to be quite careful in your framework for investing in AI, without getting too carried away.”

He added that investors who fear volatility would fare better to work with an adviser on a long-term strategy and stick to it.

“Essentially, that’s the perfect antidote to market timing, which is an absolute disaster foremost equity investors. People have been saying to us that equities are expensive for the last decade or so. And it’s a great time to be buying equities when everyone thought there was going to be a recession. No doubt, the markets would crash again. So, just have a strategy and invest in it regularly.”

Peter Branner, chief investment officer of abrdn, is concerned about concentration risk, where mega-cap stocks have an outsized share of broad market indices and are driving returns.

Most indices are weighted by market capitalisation. The Magnificent Seven stocks – comprising Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – make up more than 20 per cent of the MSCI World, and nearly 30 per cent of the S&P 500.

Branner said abrdn has a global quantitative strategy to underweight the Magnificent Seven stocks by, say, 5 per cent. That 5 per cent is reallocated into around 150 smaller cap stocks. “There are companies that have done pretty well, but they are not as big nor as meaningful in the index.”

He said investors should be aware of concentration risk and be comfortable with the risk level in their portfolio. “Markets are dynamic, and the current largest companies may not be the largest companies going forward. As a community, investors are not good at seeing trend breaks. And we’re also not so good at understanding exponential growth.”