Over the past couple of years investors have understandably sought comfort in cash, given the high rates on offer and the significant market uncertainty.
We think it could be the right time for investors to review their cash allocations versus riskier assets, both from a risk and opportunity cost perspective, especially as we move toward an environment characterised by falling rates.
We have been deploying cash into bonds, attractive stocks and liquid alternatives in the appropriate portfolios where we have the discretion.
Long-term loss
Cash may seem appealing if we look at current yield levels, and it certainly has applications for balancing equity exposure and short-term liquidity needs.
Central banks have begun the year on another tightrope between balancing inflationary forces and the pressure to drop interest rates.
In our view, the global economy faces an asymmetric outlook in 2024; meaning greater dispersion in regional returns and greater opportunities for investors willing to embrace risk.
One of the benefits of being in cash is to allow investors to deploy it in a timely way into investment strategies that can properly take advantage of dispersion and dislocation.
Taking more risk
There is no doubt that markets will face high levels of volatility this year, and sluggish growth is likely to be a feature of most economies.
In fact, we see the worsening economic backdrop as an attractive risk-reward opportunity for plenty of asset classes.
While 2023 was a less than stellar year for alternative investments such as renewable energy, we believe they remain broadly attractive.
Revenues of many of the underlying companies in the alternative investment sector are index-linked, so can offer some protection against inflation.
Across more mainstream asset classes, bond markets are also showing signs of real recovery following a challenging period.
It is a fragile geopolitical backdrop and the uncertainty this creates adds to the value of diversifying or hedging strategies.
We think bond yields are looking increasingly attractive with shorter maturity bonds yielding between 4.5 per cent and 5.5 per cent.
After over a decade of negative real yields, investors can now achieve true inflation protection from fixed income.
We are constructive on equity markets, where we see strong pockets of opportunity. It has been quite a challenging 12 months for equity investors, although price/earnings ratios do look to be improving and fiscal spending has remained supportive.
Placing portfolio defences
It is important to bear in mind that there is no ‘risk-free’ route for investors, especially within a new market regime characterised by high levels of volatility.
The possibility for inflation to inflect, corporate
profitability to be squeezed, and a disappointment in growth are all potential fears. Much like 2023, we could see markets whipsawed by these competing narratives.
It is a fragile geopolitical backdrop and the uncertainty this creates adds to the value of diversifying or hedging strategies.
For investors willing to take on some risk, protected by strong diversification and well-constructed hedging strategies, the potential rewards to be earned are significant.
We think the conditions we face lay the foundations for a more dynamic absolute return approach that can capture diverse opportunities across asset classes while protecting against downside risk.
We want more alpha not beta
An absolute return multi-asset approach can benefit from a significant exposure to cash, cash-like instruments and bonds alongside capturing upside opportunities using derivatives, as well as carefully deploying cash into attractively valued assets.
This can provide superior upside and downside protection in comparison to holding cash through its diversified nature. A dynamic portfolio can provide a combination of direct and indirect hedges, offsetting some of the risk created by market volatility.
While there are fewer market participants offering absolute return multi-asset strategies today, given the headwinds over the past decade, we believe this skill-set is more relevant now than ever before.
Mitesh Sheth is chief investment officer for multi-asset at Newton Investment Management