Cash may not be king after all

05:55 AM Dec 17, 2009The investment outlook for 2010 is shaping up fairly well. In this article, director at UOB Asset Management, Anthony Raza, sheds light on why investors should get invested and be balanced.


In 2008, many investors learnt that cash was a great investment. Equities in markets around the world fell by 50 per cent and 60 per cent and even the bluest of blue chips did not emerge unscathed.

Cash investment became less attractive this year as equities rebounded by 20 per cent in developed markets and over 60 per cent in emerging markets.

Has the rally been missed? Most data have indicated that many investors are still holding cash after pulling their money out of equities last year; we are concerned that investors may have learnt the wrong lesson from the recent crisis.

Staying in cash in 2010 could expose one to more risks than expected. On a risk/reward basis, cash is not very attractive. Inflation is growing as a risk, especially in Asia, and cash has no inflation protection.

With the average bank deposit interest rates at less than 1 per cent, there is no compensation for the risk of an investor's cash dwindling in value.

These are clearly difficult and confusing times, and investors are likely getting conflicting advice.

If you were to poll five economists about what will happen over the next few years, you would likely get five very divergent views.

Some may say that inflation is a big risk while others will see deflation as the risk; some think that the recovery will be "V" shaped while others say that it will be "L" shaped.

Without even stating our view on the trajectory and risks in the economy, we would say that, historically, investment in equities during such similarly confusing times usually have long periods of strong performance.

So, even if you are not convinced that all is right in the global economy, there is, however, a strong case for you to get invested in the markets again.

In 1933, 1975 and 1982 were periods with very deep recessions. In 1933, the United States gross domestic product (GDP) fell by 25 per cent from pre-bust levels, unemployment was over 20 per cent and there was persistent deflation.

In 1975, there was stagflation (low growth and high inflation). In 1982, interest rates in the US were over 15 per cent and the unemployment situation was similar to what the US is facing now.

For the 1933 and 1975 recessions, the economic problems took around seven to 15 years to really work out.

But the markets did perform during these periods: In 1933, the stock market rally began and lasted for five years and increased over 300 per cent; from 1975, the stock markets rallied for two and a half years and increased almost 90 per cent. And 1982 was the start of the longest bull run in US equities that lasted for 18 years.

Unlike most investors in developed markets, local investors tend to be less balanced in their investments.

When willing to take risk, many investors will go to the extremes of placing heavy allocation in small-cap equities; similarly, risk-averse investors will go to the extremes of putting their life savings in principal-protected structured notes.

Neither may be advisable strategies over the long term. A more advisable strategy is to invest in a balanced portfolio of equities, bonds, properties, commodities and cash.

Don't stay on the sidelines or wait for the market to reach bottom to get invested again.

In our view, 2010 is shaping up to be a fairly good year for markets despite all the economic confusion.

Our investment stance is to stay invested and maintain a healthy balanced portfolio to diversify the risks in the current investment landscape.

We are overweight in equities with a focus on emerging markets.

In bonds, we are overweight in corporate bonds with a focus on emerging markets. In commodities, our only overweight is in gold.