Investors are being warned against the temptation to hold large amounts of cash in their portfolios due to the current volatility in the stock and bond markets. Despite cash interest rates being around 5%, experts argue that shifting to a cash-heavy portfolio would be the wrong move.
There are three possible scenarios for the global economy going forward: recession, resilience, or stagflation. The most likely scenario, according to the writer, is a recession caused by interest rate hikes to combat inflation. This would result in central banks easing off on interest rate hikes, leading to higher bond prices. Investors who bought 10-year US Treasury bonds at a yield of 4.5% could see returns of over 20% if the recession is severe.
In the second scenario, developed economies remain resilient, with consumer spending remaining strong. In this case, cash rates would stay elevated but government bonds would see a drop in prices. Sectors like global financials and small-cap stocks would outperform cash due to the perceived health of the economy.
The third scenario, which is thought to be the least likely, is stagflation where inflation accelerates, causing market chaos similar to that seen in 2022. Stock benchmarks and government bond prices would fall, and even inflation-linked bonds would not be reliable. However, there are still options that would outperform cash, such as commodity stocks and assets in private markets like infrastructure and timber.
Investors are advised not to let short-term interest rates lead them to hold excessive amounts of cash. Despite the current volatility, cash is unlikely to be the best option for long-term investments.
More detail via Financial Times News here… ( Image via Financial Times News )
