Choosing cash over fixed income doesn’t make sense

Australian investors have largely missed out on the 20-year bond rally, preferring instead to invest in cash for their liquid/defensive asset holding. However, they missed out on a major benefit of holding high quality bonds – the negative correlation they provide to equities. This particularly came to light in the GFC when equity prices collapsed and Australian investors had no fixed income exposure to offset the negative returns from equities. In addition, investors in cash/term deposits tend to be more exposed to cash rate cuts. Weakness in the economy has seen the Reserve Bank of Australia (RBA) slash interest rates over the past few years, leading to a plunge in term deposit rates. Although this has also had the effect of dragging down bond yields, making bonds more expensive, we believe they are still likely to outperform cash, particularly if the cash rate keeps falling. Given the current economic environment both globally and domestically, the cash rate is likely to remain lower for longer. As a result, Australian investors may want to reassess their low exposure to fixed income. (VIEW LINK)