Your cash ain’t trash when stocks and bonds are down in the dumps

The Globe and Mail (Alberta Edition) - - REPORT ON BUSINESS - TIM SHUFELT I NVESTMENT RE­PORTER I NSIDE tHE MAR­KEt

When ev­ery­thing else is fal­ter­ing, cash be­comes king. With stocks, bonds and com­modi­ties all in an un­usual, si­mul­ta­ne­ous slump this year, cash and cash equiv­a­lents stand to best them all as a top-per­form­ing fi­nan­cial as­set.

The re­turns of­fered by cash prox­ies such as guar­an­teed in­vest­ment cer­tifi­cates and short­term gov­ern­ment bonds, while mod­est, are at least pos­i­tive.

Long-term Cana­dian bonds, on the other hand, have re­treated as yields have in­creased, while the S&P/TSX Com­pos­ite In­dex is down 8 per cent this year.

Also in neg­a­tive ter­ri­tory: eq­ui­ties, cor­po­rate debt and gov­ern­ment bond in­dexes in many global mar­kets, as well as a range of com­modi­ties from crude oil to gold and cop­per.

The global down­turn in fi­nan­cial as­sets this year has pro­duced a rare top rank­ing for cash.

“Cash to me is a le­git­i­mate as­set class,” said John Zech­ner, pres­i­dent of Toronto-based wealth man­age­ment com­pany J. Zech­ner As­so­ciates.

“I’ve been through too many cy­cles when I was kick­ing my­self for not sell­ing enough when val­u­a­tions were ex­tended and things were slow­ing down.”

Over the course of the bull run that be­gan when mar­kets bot­tomed out in 2009, rock-bot­tom in­ter­est rates and mea­gre bond yields pushed in­come in­vestors into the stock mar­ket as the only place to earn a de­cent re­turn. Cash was seen as dead money.

This year, how­ever, cash has proved its value as a hedge against stock volatil­ity.

Cash re­turns as ap­prox­i­mated by Canada three-month trea­sury bills have ex­ceeded Cana­dian eq­uity re­turns by about 10 per­cent­age points.

In the United States, cash prox­ies have also out­per­formed the S&P 500, which has been driven into neg­a­tive ter­ri­tory on the year by the re­cent sell-off.

Go­ing into next year, muted ex­pec­ta­tions for eq­uity per­form- ance, com­bined with ris­ing in­ter­est rates, have shifted the prospects for rel­a­tive per­for­mance be­tween as­set classes.

“Cash will rep­re­sent a com­pet­i­tive as­set class to stocks for the first time in many years,” said David Kostin, chief U.S. eq­uity strate­gist at Gold­man Sachs, in his 2019 outlook.

But U.S. in­vestors are not po­si­tioned for a late-cy­cle mar­ket, when eq­uity re­turns tend to be­come less re­li­able and more volatile, Mr. Kostin said.

At the end of the sec­ond quar­ter, house­holds, mu­tual funds, for­eign in­vestors and pen­sion funds with money in the U.S. mar­ket had a 44-per-cent weight­ing in eq­ui­ties – the high­est level of eq­uity ex­po­sure since the tech bub­ble in the late 1990s, Mr. Kostin said.

At the same time, those in­vestors had cash al­lo­ca­tions of 12 per cent, which is the low­est in 30 years.

“We rec­om­mend mixed-as­set in­vestors re­cal­i­brate their port­fo­lios by re­duc­ing eq­uity hold­ings and lift­ing cash al­lo­ca­tions,” Mr. Kostin said.

Gold­man Sachs is pro­ject­ing that the S&P 500 will gen­er­ate a mod­est, sin­gle-digit re­turn next year, while three-month T-bills should see a to­tal re­turn of 3 per cent.

In Canada, re­turns on short­term in­vest­ments have risen in re­cent months as the Bank of Canada has hiked pol­icy rates. One-year GICs now of­fer as much as 3 per cent.

“You’re not go­ing to re­tire rich on that, but cash is at least go­ing to give you your money back, with a bit of re­turn,” said Ian de Ver­teuil, head of port­fo­lio strat­egy for CIBC World Mar­kets.

Ex­pec­ta­tions for higher short­term rates in Canada have fallen back of late, how­ever, as the col­lapse of Al­berta crude prices has clouded the do­mes­tic eco­nomic outlook.

But nom­i­nal cash re­turns will at least be guar­an­teed to be pos­i­tive and with next to no volatil­ity.

“Hold­ing cash pro­vides some down­side pro­tec­tion and de­fen­sive­ness,” said Colin Ste­wart, chief ex­ec­u­tive and port­fo­lio man­ager at JC Clark Ltd. in Toronto.

“It can be use­ful in pe­ri­ods of un­cer­tainty. And now would be one of those times.”

In JC Clark’s long-only funds, cash weight­ings sit be­tween 10 per cent and 30 per cent, Mr. Ste­wart said.

“I would not want to sug­gest that we or any­one else have a long-term in­vest­ment strat­egy of hold­ing 30-per-cent cash.

“That’s just not a smart idea,” he said.

In­fla­tion erodes the value of cash, while eq­ui­ties have gen­er­ally proven to gen­er­ate su­pe­rior re­turns over the long term.

the re­turns of­fered by cash prox­ies such as guar­an­teed in­vest­ment cer­tifi­cates and short-term gov­ern­ment bonds, while mod­est, are at least pos­i­tive.

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