You will be quite aware that any cash lingering in bank accounts is generating precious little if anything in terms of interest. Business accounts in Europe subject to charges making them effectively negative yielding and when rates hit rock bottom last time, the introduction of charges for domestic savers was considered and may well be up for discussion again. Money is being debased at such a pace that leaving it sitting in the bank seems no longer to be an option for many. Indeed, as investors of wealth, cash we hold is coming under increasing pressure and could soon become a cost.
Over the last few months, US monetary growth has broken new highs each week with US M2 (a measure of money supply) growth now at around 25% year on year, more than six times the structural growth rate of nominal GDP. This rate of money printing has never before been seen in the history of the US or any other G7 economy and puts cash in danger of becoming worthless.
This state of affairs is exactly what the policymakers have intended – to nudge clients to spend or invest and not to sit on it. In many ways this has assisted in propelling equity markets with record amounts of cash being withdrawn from money-market deposits in June. This shift from cash to equity is partly due to the lack of a return, but also due to renewed confidence in the outlook for a resumption of global corporate activity and perhaps also because, as an alternative to equities, government bonds, (and to a lesser extent corporate bonds) look even less attractive than cash given solid banking systems but highly indebted governments and low corporate yields.
It is this later point which is of concern. In effect, investors may feel they have no alternative for their cash than to invest in higher risk assets in order to make some form of return and they may not be factoring in the potential risks that go with it.
Equity prices, however, are usually determined by a company’s expected future cash flows (now looking towards 2021/22), discounted by the ‘risk-free’ interest rate (now near zero in much of the developed world at least) to which is added a ‘risk premium’ (the amount an investor should receive to compensate them for taking the financial risk of investment in the company’s shares). However, the world hardly seems a less risky place then a year ago with greater uncertainty regarding the ability of companies to resume cash flows, let alone at reduced or similar costs given the expense firms endure in countering the virus. Accordingly, with the global equity index returning to its pre-Covid level, equities are priced relatively higher now than they were 6 months ago and investors are wondering if this can be justified.
We believe this supports our neutrality in equities at the present time and our increase in allocation to non-equity and non-bond assets, such as hedge funds, gold, property and selective private assets. But within equities, there may now be an argument for a change in regional positioning as those economies that have had the printing presses turned up to the max suffer a depreciation of their currencies and thus devaluation of asset values relative to those economies with more stable money supply. The US dollar and the pound sterling could suffer relatively as a consequence and investors might well consider a shift towards Asian, Japanese (and to a lesser extent European) priced assets provided opportunities for investment stand up in their own right. Big technology (beneficiary of lockdowns), green investments (stated western government policy), and precious metals (including their miners) have all fared well and may continue to do so; so finding firms in these industries, priced in Asian and emerging market currencies but with global distribution and pricing power is where our global equity mangers are beginning to focus.