Column: The dethroned money can always reign in times of stress

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By Mike Dolan

LONDON (Reuters) – Money may not be king anymore, but it can still rule sometimes.

With central bank interest rates at historically low levels for much of the past decade, most long-term investors have found “money to be waste”, quickly burning a hole in their yields. .

Meanwhile, G4 policy rates have been reduced to near zero or below since the onset of the coronavirus crisis, frustrating attempts at currency normalization.

As a engorged pandemic recovery fuels inflation and inflation expectations, transient or not, these cash rates have all become more deeply negative in real terms, making money an ugly place for any size. medium term.

And yet, asset managers haven’t completely given up a bit of cash below the portfolio floor, as it still offers the flexibility and liquidity to maneuver in rough waters.

BlackRock strategists, for example, maintain a tactical “neutral” cash weighting over a 6 to 12 month period to compensate for their moderately “pro-risk” view – keeping a portion to “potentially add more to risky assets by market turbulence ”.

And this is where the old boring and deficit cash still has a role, if only temporarily in the short term.

The cash argument isn’t about its return, but how you avoid losing your shirt on everything else, including traditional safe havens like government bonds.

Robeco’s five-year annual investment outlook this week is that with projected annualized dollar inflation from 2022 to 2026 estimated at 2.25%, their expected dollar cash return of 1.0% results in a real loss. annualized by approximately 1.25%.

This negative real outlook also applies to top-rated government bonds, leaving Robeco’s only anti-inflation projected yields through 2026 in stocks, real estate, commodities, junk bonds and debt. local emerging markets.

As markets rethink the horizons for the central bank’s rate hike through to next year, historically high government and corporate bond prices and more tight stock prices may face a downturn. significant revaluation and a significant decline.

Top rated bonds have often been the “go-to” buffer against market corrections. But many investors believe their extreme sub-zero real returns and high prices mean they are embedding one-way risk that may well correlate or even cause stocks to rocket.

Less volatile liquidity is simply less risky.

TREASURY REGENCY

Morgan Stanley multi-asset strategist Andrew Sheets says cash pays relatively little because it has, by definition, the lowest risk premium. And when riskier assets face turmoil – as he believes they should in the last quarter and into 2022 – liquidity is still running month-to-month.

In short bursts, money pays relatively more with less risk. Sheets says that since 1959, the probability that US liquidity will outperform the S & P500 in a month is 40% and one in three over a 6-month horizon.

“Investors should hold an above-average cash allocation,” he told clients, adding: “This argument is stronger compared to U.S. and emerging market assets and weaker for those from Europe and Japan. “

“The flip side of silver being a boring, low-yielding asset is that it has an attractive risk profile that can help within portfolios as a buffer against market volatility.”

Using estimates over the past 10 years of what is known as the “cVaR”, essentially the average of monthly losses beyond the supposed “value at risk” measures built into implied volatility gauges, cash shine with -0.1% against more than 9% for equities, 1.7% for Treasury bills and 4.9% for high quality corporate bonds.

The implications for investors who store higher-than-usual cash are significant, potentially amplifying wider market declines late in the year and likely skewing many people toward the dollar.

Bank of America’s monthly survey of fund managers at the end of August showed cash holdings at 4.2%, well below the 10-year average. But, perhaps with the end of the third quarter in sight, the BoA-tracked flows saw the first weekly outflow of global equity funds last week and nearly $ 40 billion pouring into treasury funds.

As markets falter and the dollar rises in strength, this may well force a rethink of increasingly hawkish signals from the central bank regarding tightening ultra-accommodative monetary policy.

And if the dollar were to take off more strongly, that in itself could curb the kind of surging commodity prices creating so much inflationary angst among policymakers.

A circular stabilizer perhaps, but not without a potentially reluctant period when cash once again wears the crown.

(by Mike Dolan, Twitter: @reutersMikeD; edited by Alexander Smith)


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