What should I do with my cash holdings?
Cash deposits have become more appealing to many investors as central banks have raised policy rates and as equity market volatility has increased. But we think this appeal is superficial. Inflation has reliably eroded the real value of cash deposits over time, with a 21% decline in purchasing power for euros since 2007, 23% for US dollars, and 25% for sterling. Deposit rates also have the potential to fall fast when the rate-hiking cycle turns.
We therefore think investors shouldn't wait for the final rate hike of a cycle before looking for opportunities to lock in attractive yields. We believe the current market environment provides an opportunity for investors to reevaluate their liquidity holdings, and ensure they are sufficiently invested and diversified. Those holding too much cash overall may consider averaging into diversified portfolios. Those with adequate liquidity could consider locking in attractive rates in fixed income and benefiting from diversification in the event of a recession. We prefer higher-quality areas of fixed income, including high grade and investment grade bonds. Read more in our recent report, "Saving as interest rates peak: Fix, float, buy, or hold?" (15 March 2023).
Is the US dollar set to weaken?
The DXY dollar index fell 2% in March as turmoil in the banking industry led investors to scale back expectations for the likely peak in US interest rates. We believe the US dollar is set to weaken further this year, as US growth and interest rate premiums relative to the rest of the world erode.
Investors looking to position for a weaker dollar should diversify their dollar cash or fixed income holdings, hedge outright, or position in options or structured strategies. On a relative basis, we prefer the Australian dollar as well as the Swiss franc, euro, pound, yen, and gold. We maintain a positive price outlook on the yellow metal, and continue to recommend holding positions in gold as a hedge within a portfolio context.
What are the key opportunities in sustainable investing?
Green investment is stepping up around the world in response to the US Inflation Reduction Act. The European Commission has responded with the EU Green Deal Industrial Plan for the Net-Zero Age. These commitments should particularly benefit innovative companies focused on improving resource efficiency, including energy (e.g., renewables, or clean air and carbon reduction solutions) and water. Read more in our recent report, "European greentech leaders: The next step up" (20 March 2023).
We also like sustainable bonds (including green and multilateral development bonds), and see a growing opportunity to implement hedge funds and private markets within sustainable investment strategies, for example in the areas of education and health. Investors considering alternative investments like hedge funds and private markets need to be aware of risks like reduced liquidity, higher costs, and complexities.
For more topics, see Top 10 questions answered.
