Many equities and bonds have had a
difficult first few months of 2022.
And one of the things that's worrying
investors most is tighter
monetary policy.
The US bond market is currently pricing
in one of history's largest rate
increases over the next two years.
At Citi Global Wealth Investments,
we doubt that the Fed will
actually tighten as much as that.
Instead, we expect market interest rates
to peak at some time in 2022,
and even if the Fed did tighten as much as it is suggesting,
history also suggests it would then be cutting rates again
just six months later or so.
Amid all the uncertainty,
we're hearing many investors ask the same question:
"Isn't now a good time to hold cash?"
Despite the rise in interest rates,
things haven't really changed much for the owners of cash.
After adjusting for inflation,
cash interest rates and most leading economies
remain deeply negative.
In the US, consumer price inflation recently hit 8.5%
and is expected to decelerate slowly.
While readings may not stay this extreme,
interest rates below the rate of inflation
could be a fact of life for some time to come.
The effects of this for the owners of cash is painful.
We compare the process to the exploits of a cash thief
who silently steals your purchasing power year after year.
Far from offering safety,
therefore, we warn that sitting on lots of cash
risks leaving you much poorer over time.
In our view, the cash thief's exploits
call for prudent investors to take action.
Our preferred approach is to seek out assets
that may generate a positive real income for portfolios.
In recent years, ultra low yields of many bonds
have left them as vulnerable as cash.
A few months into 2022, however,
and the situation now
looks rather different.
If you've been waiting
for a rise in yields,
we believe your wait is now over.
And while inflation has risen
more than almost any yield
over the past year,
we don't believe inflation
will be two to three
percentage points higher
for every year going forward.
That's how much various
high-quality bond yields
have increased in 2022.
As well as now offering
more attractive income,
they also have the potential
to diversify portfolios.
Among those that we favor are
US investment grade bonds,
US preferred securities,
Select emerging market US dollar
denominated bonds.
Our message for investors is clear:
Your cash remains very much at risk
from negative real interest rates.
That said, however,
we also see attractive options from putting cash to work
and seeking yield in your portfolio.
While some of these are within fixed income,
other asset classes have a part to play.
In equities, we favor allocating to dividend growers,
companies with a solid history
of growing shareholder payouts
and select natural resources investments.
For qualified investors,
we also see income potential
in certain capital market strategies
and private market strategies.
Remember, seeking a positive real income
can help defend your purchasing power.
It's time to get portfolios fully invested
and keep the cash thief at bay.