Tara Gillespie, Head of Global Assets at Redington, has commented on potential cash alternatives for investors navigating the fixed-income bear market.
“2022 has been a real ‘I told you so’ moment for any investors who’d moved out of bonds and into cash by December last year – equities were still in a 12-year rally and the narrative around inflation was still very much, ‘It’s transient.’ In reality, the attraction of cash has been greatly amplified by events this year that could not have been predicted, like Russia’s invasion of Ukraine or Kwasi Kwarteng’s mini-Budget. Nevertheless, if you’re sitting on a 60/40 portfolio with 40% in cash right now, you’re probably feeling pretty pleased with yourself.
“But with a recession on the cards and 2023 approaching fast, where do you go from here? If you want to make that 40% work harder next year, are there really any good alternatives to cash?
“Given the hit to bond market valuations this year, you can expect to generate a far more attractive yield from these assets going forwards. With the market pricing in 10-year gilt yields at 4.15% and 10Y-year treasuries at 3.83% at the end of Q3, even the highest quality bonds are beginning to look interesting.
“Beyond the world of fixed income, there are many attractive investment opportunities that have low correlation to both equity and bond markets. Liquid alternatives offer a low-cost access route for alternative risk premia and alpha sources that provide genuine diversification to traditional investments. We’ve seen these characteristics play out this year, with most equity markets in the red and many liquid alternative funds in positive territory.
“Is it now or never? This is a volatile market environment; consequently, the data we’re basing our investment decisions on is often stale before it’s even hit the page. In times like these, it’s wise to spread the entry point. This doesn’t mean being too smart around ‘timing the market’ – attempt to do that and things might reverse before they reach the level you were waiting for. But it does mean ‘time diversifying’, so you aren’t overly exposed to market conditions on any single day. This could be over a period of weeks or months, depending on your strategic needs.
“The reality is, we don’t know for sure what markets will do over the next year. But through a diversified mix of fixed income and alternative investments, we do believe there’s a good alternative to cash.”