Negative yields and high opportunity costs have made holding cash unattractive to many investors, but one financial institution is encouraging its clients to take a fresh look at the asset class.
Russell Investments has set out reasons why the economic backdrop is becoming conducive to hold the most liquid of assets—and why 2015 will be different than last year.
“In a world of dovish central bank policy, it was easy to dislike cash,” said Wouter Sturkenboom, senior investment strategist at the company, referring to 2014. “After all, central banks clearly signalled yields were going to stay low for a prolonged period of time and simultaneously increased inflation expectations. As a result, investors in cash in developed markets were confronted with a long period of deeply negative real yields.”
Alongside this, other asset classes were attractively valued while liquidity from central banks meant volatility was dampened so buying them was relatively easy, Sturkenboom said.
In this situation, cash acted “like a swimsuit”, he said, citing Warren Buffett’s swimming naked adage, but this coverage was unnecessary when the tide—pushed by waves of liquidity—keeps coming in.
“Looking ahead, there are a number of reasons to be positive about cash,” Sturkenboom said. “Although real yields are still negative, they have been rising over the course of 2014, mostly a result of falling inflation on the back of lower commodity prices. We expect this to continue in 2015 when we anticipate the Fed and Bank of England will begin to raise interest rates, likely in Q2.”
Additionally, the cost of holding the most liquid of asset classes has fallen over recent years, he said, as most others have become expensive. In 2015, the cost of corporate and government bonds and real estate has increased, and the assets now offer low to negative returns, making cash look good.
The final backing for coming back to cash is the end of quantitative easing in the US, Sturkenboom said. Despite the promise of the European Central Bank partially taking up the mantle, volatility is set to return to markets and “having a swimsuit will come in very handy”.
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