The Resilience of Cash Across Various Market Cycles

In the month of September, the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) decided to leave the repo rate unchanged at 8.25 percent. The decision to pause was not unanimous, with three members of the MPC voting in favour of this outcome, while two other members preferred a 25 basis points (bps) increase. 

Views around inflation have remained polarised over the last 18 months, however two prevailing arguments have since resolved the long-standing dispute. The first is that peak inflation is now firmly behind us. The second is that inflation in many countries is starting to fall towards target.  

While the second argument may be true, the pace in price moderation is somewhat sticky, requiring higher for longer policy rates. The Forward Rate Agreement (FRA) market seems to concur, and now pricing-in another 25-bps increase in November 2023 before interest rates start to retreat in the second half of 2024 (see Figure 1). 

Figure 1: The Forward Rate Agreement (FRA) market’s implied policy changes over the next two years. 

Over the medium term, however, changes in policy rates will likely depend on the resilience of the world economy following a short period of ultra steep interest rate hikes. A more favourable macroeconomic backdrop would imply limited scope for deep interest rate cuts, while the converse is also true in a more benign setting.

Regardless of the impending policy response to either scenario, cash is still expected to remain the mainstay asset class as a more benign economic setting would still result in greater headwinds on both the earnings and performance of more riskier asset classes (i.e., equities). 

We illustrate this view through observing the stability of cash returns across various market and interest rate cycles (see Figure 1). While the superiority of cash may be difficult to maintain over the longer-term, we continue to stay constructive on this asset class in both real and risk-adjusted terms.

Figure 2: The rand (ZAR) performance of selected asset classes by calendar year and sorted by total return.

Fund Comment

Our cash and income funds remain overweight floating rate instruments, thereby immunising our portfolios against interest rate fluctuations. This further ensures a consistent level of outperformance relative to benchmark over various measurement periods. Where applicable, we sought to enhance yield through either extracting the liquidity, term, or credit risk premium, while simultaneously funding issuers at wholesale lending rates. 

This article was written with Taquanta Asset Managers – Nedgroup Investments Best of Breed Partner.