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HomemibusinessCash is King

Cash is King

Following the financial crises the investment world is a different place. With cash becoming more active in the push for returns, it is now considered ‘King’

Some market commentators argue that the resources boom is protecting the Australian economy. Yet the Reserve Bank of Australia has kept interest rates steady and consumer confidence continues to wane as question marks hover over the economic situation in Europe and the United States.

Despite being the third year out of the GFC, the memory lingers and the fact remains that while share markets remain unpredictable and cash is able to deliver better yields and capital security, cash investments are likely to remain favourable among Australian investors.

Once a Nation of Risk-takers

Pre 2008, Australian investors typically were a nation of risk takers, happy to leverage their positions into high return investments. It wasn’t long ago that margin loans were wide spread and money was being made on an upward trending share market. That has changed dramatically and over the last couple of years we have seen a rush towards the safe haven of cash.

If you asked most people in the street today whether in retrospect they would have been happy to lock their money away in an 8 per cent term deposit in July 2008, the answer would most likely be yes…

Traditionally, bank deposits have been viewed as a conservative choice of investment and a fairly inactive asset class. Cash was generally seen as a place to hold savings ahead of a longer term investment, however today’s attitudes towards cash appear to have significantly changed.

Ivan Katz, who heads up Financial Markets at Investec Bank, says cash is now no longer just a short term investment, but can contribute effectively to a balanced portfolio, if durations and returns are actively maximised.

“Cash is once again a credible asset class, with it’s own investment characteristics and attributes, the decision to use cash in a portfolio is now being viewed as an active rather than passive investment decision,” Mr Katz said.

Competition for retail deposits coupled with relatively higher interest rates have resulted in cash offerings being an attractive investment proposition for an ever increasing segment of the investor market.

With term deposit rates around six per cent per annum, this sets a high risk-free rate of return, investors feel comfortable with the guaranteed return and obviously no risk of capital loss.

Mr. Katz says Investec has also seen an increase in Small Managed Superannuation Funds (SMSF’s) utilising deposit offerings and using cash more effectively to maximise returns.

“SMSFs in particular are a lot more active with cash. These products give clients the ability to break the cash component of a portfolio into rolling term deposits for example three, six and 12 months,”
Mr. Katz said.

“It means clients are comfortable, they will always have access to cash if they need it and can take advantage of rate changes to ensure they are getting the best return.”

For How Long?

So how long is this attitude towards cash going to last? Is this investor mindset here to stay?

Mr. Katz believes clients are investing within the current trend, making cash a tactical, short-term play.

“Cash should be seen as that stable, riskless investment option for investment terms less than two years… as long as we continue to see volatility in equity markets, cash has a vital role to play.”

“The memory of falling markets is still vivid for many people and while uncertainty prevails, cash will seem like a knight in shining armour. However as time progresses and markets recover to the point where we start to see double digit returns, those memories will probably tend to fade,” said Mr. Katz.

“If you asked most people in the street today whether in retrospect they would have been happy to lock their money away in an eight per cent term deposit in July 2008, the answer would most likely be yes. But if you had asked that same question at the time, I suspect a different answer would have been given,” he said.

The information contained in this article (“Information”) is general in nature and has been provided in good faith, without taking into account your personal circumstances. While all reasonable care has been taken to ensure that the Information is accurate and opinions fair and reasonable, no warranties in this regard are provided. We recommend that you obtain independent financial and tax advice before making any decisions.The opinions expressed in this article are those of the author and do not necessarily reflect the opinions of Investec Bank (Australia) Limited.