Are wary investors on the right track, moving money to cash?

29 May 2023

Although cash is the least volatile asset class, it is also least likely to deliver significant real returns. However, this does not mean that investors should rule it out entirely.

As the country’s economy continues to falter with poor growth and the rand tanking, a record amount of R1.6-trillion is currently being held in South African bank accounts as retail savings deposits.

Michael Kruger, senior investment analyst at Morningstar Investment Management SA, points out that this staggering amount of money is conservatively invested, reflecting the uncertain environment investors face.

“Return expectations from cash are largely a function of the prevailing level of interest rates. The South African Reserve Bank’s (Sarb) primary monetary policy objective is price stability, and, secondly, to enable balanced and sustainable growth.

“The Sarb will, therefore, adjust the level of interest rates according to their current and future expectations for inflation, as well as their outlook for the local economy,” he says.

Just last week, consumers took another 50 basis point increase in interest rates, which lifted the bank’s prime lending rate to 11.75% in the 10th consecutive interest rate increase.

Old Mutual’s wealth investment strategist, Izak Odendaal, says the good news is that higher short-term interest rates present better opportunities for investors seeking low volatility returns or high levels of current income.

“Money market and income funds, and guaranteed annuities, are all offering attractive yields, especially considering that inflation has peaked and should gradually decline in the months ahead – and stay in check over time,” Odendaal says, adding that unfortunately for borrowers, higher interest rates will continue to put pressure on an already beleaguered local economy.

Stubbornly high inflation

Unfortunately, despite inflation moderating from its mid-2022 peak, it remains stubbornly high, with the latest print to the end of March 2023 coming in at a year-on-year figure of 6.8%.

This is above the Sarb’s target band of between 3% and 6% and means that conservative investments in cash are unlikely to reach the historic long-term real return provided by these investments of 2% in the short term.

Kruger says cash is the perfect asset class to allocate to for near-term expenses or an emergency fund. This is largely due to the underlying characteristics of cash when compared with other asset classes such as equities, bonds or listed property. Investors in cash have the benefit of a smooth and stable return profile with very little volatility – all essential ingredients for those investors with short-term funding needs.

“Over the long term, however, cash can be a drag on the real return prospects of an investment portfolio. For those investors who are seeking long-term capital growth, it is essential to have sufficient exposure to growth assets such as equities, as well as exposure to bonds, which brings a level of ballast and stability to a portfolio,” he advises.

The differing characteristics of the various asset classes are apparent from the below chart, which shows the performance of S.A. asset classes over the past 20 years.

investors cash

As the chart shows, cash does provide a smooth and stable return profile. However, Kruger points out that over the long term, investors willing to stomach the additional volatility of investing in growth assets, are rewarded with higher returns.

“Investing in growth assets can be a bumpy road, as evidenced by the setback to the returns of both equities and listed property during the global financial crisis in 2007/2008 and the Covid-induced market drawdown in early 2020. However, those investors that remained invested during these two market events were rewarded with superior real returns over the long term,” he says.

Although cash is the least volatile asset class, it is also the least likely to deliver significant real returns. However, this does not mean that investors should rule it out entirely.

Kruger says cash brings an element of capital preservation to a portfolio, particularly in the event of significant market volatility in equity or bond markets. It also provides an element of optionality, which fund managers can hold as dry powder to deploy if markets move away from their underlying intrinsic value.

“For all its benefits, however, cash should not be regarded as a method to maintain or grow real wealth. It should also not be used as a hiding place for those investors that are fearful of current market conditions due to negative news headlines or geopolitical events,” he says. DM

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Stubbornly high inflation