Rising Role of Cash: The “New Normal” in Wealth Management

Throughout the past decade the world economy is witnessing systemic transformation – from fewer growth drivers and lower growth rates to confusing patterns of cross-country investment and changes in regional/global institutions.

All this in turn is accentuated by elevated volatility and whimsical swings in capital flows in financial markets. The key culprit accounting for changes in investment patterns in the world economy is the “new normal” of lower growth rates around the globe. This “growth malaise” is generating a pronounced shift towards risk-aversion across the entire spectrum of investors, including with respect to high-net-worth individuals, for whom “hoarding cash” is becoming the dominant investment strategy in current somber circumstances. 

Indeed, according to Wealth-X and its Census of billionaires around the world, throughout the past year the affluent part of the globe was frenetically selling whatever assets/holdings that were amassed in the past for the sake of the security of plain cash. As of 2015 the share of cash in investment portfolios of high net worth individuals rose to all time high of 22.1% - in other words nearly a quarter of all wealth was stored in cash/bank deposits. This trend of the rising role of cash in investment portfolios set in starting from 2012 and has accelerated ever since as the share of other havens such as real estate, bonds and private equity declined. 

The reasons behind these changes in investment patterns according to Wealth-X have to do with mounting uncertainty, which indeed seems to be permeating virtually all of the key regions of the global economy. While the developed world and in particular Europe (and most notably Sothern Europe) was likely the source of volatility and market uncertainty in 2011-2012, more recently in 2015-2016 it was more about China and concerns regarding its growth prospects. Uncertainty creates extra risk and necessitates extra returns to compensate investors, otherwise investors flock to the so-called “safe havens” typically represented by the likes of the dollar or Swiss franc. 

In this respect what is striking is that the role of cash and bank deposits has been rising in prominence despite the close to zero interest rates now observed across a wide spectrum of developed economies. Moreover, countries with negative interest rates now account for more than 20% of world GDP – and despite all of that cash is king with the wealthiest part of the globe. What this suggests is that in current circumstances the scale of uncertainty and risk is simply overbearing compared to any desire to seek higher returns.

As regards the stock markets of the world, investors are in a way faced with an impossible choice. The developed markets, most notably in the US, enjoy high valuations, which are vulnerable to reversals from the all time highs observed in some of the key stock indexes – this is what some investors refer to as the “fear of heights”. On the other hand, many emerging markets remain stuck in the low valuation domain and the fear for investors there is to be stuck in a “low valuation trap”. The periodic waves of quantitative easing do not seem to change this dualistic pattern in any major way, with risk and uncertainty remaining dominant.

At the heart of the gridlock facing global investment is the “lower growth for longer” problem – as central banks inject fresh liquidity to boost growth the fundamental problems restraining growth remain unaddressed, with a significant part of extra liquidity missing the “real sector” target. The net result is the rising divergence between the waning capability of the global economy to recover upward momentum and the ever rising level of liquidity chasing low growth. 

By now prominent market observers and pundits having apparently lost all hope in the capability of the world economy to deliver an orderly restructuring and transformation that could bring higher growth now insist that the only way out of the quagmire of the “new normal” is a full-fledged crisis. This is how self-fulfilling prophesies are set in motion and there are plenty of examples of how this led to “crises without restructuring/transformation”, with Russia most recently being a case in point. 

In light of the above, the trend towards hoarding cash amongst the wealthy is symptomatic of the weak state of the global economy. Be it as it may, storing extra liquidity in cash for the sake of security and foregoing extra gains from riskier asset allocations may be the prevalent investment strategy for a while – the good news is that even if briefly it may cool down capitalism’s animal spirits, the bad news is that the financial industry, including wealth management, will have to get accustomed to very own version of the “new normal.”
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.