Time to dash from cash?

The following is an extract from our 2025 global outlook.

In recent years, high interest rates have made holding cash attractive for many investors. With some money market funds yielding almost 5%, who can blame them? However, with the major central banks signalling ‘peak rates’ in the autumn of 2024, this trend may be coming to an end.

The market has priced in another bout of policy easing from the US Federal Reserve (Fed) in the first half of 2025. We think it is entirely possible that cuts of 100 basis points or more will arrive by March, as the fabled ‘soft landing’ is at last achieved.

Inflation has been moderating in the major economies, while growth in the US remains strong, if weak in Europe. In an environment of slow and gradual cuts, we think yields on fixed income remain attractive by the historical standards that matter – the memories of current market participants.

Cashing out

We consider this to likely be positive for fixed income strategies as we expect significant inflows in search of these yields. This is, in our view, doubly attractive as we expect spreads to remain rangebound for the foreseeable future, allowing investors to earn the extra carry.

Where rate cuts end remains an open question. But when we have a clear picture, we could well see corporates issue more long-dated debt in efforts to lock in lower coupons than they’ve faced for several years. This could in turn incentivise some investors to move away from cash, even if money market funds keep growing to match asset allocation percentages prevalent before the global financial crisis.

With this backdrop, strategies with different drivers of return to cash may be placed to benefit. Short-dated credit could be rewarded for taking on more duration; absolute return strategies are more alpha-driven, but conversely may also offer solace from any potential rates volatility. Alternatives may deliver a complexity premium.

The Trump unknown

However, as pointed out by Emiel and Tim, it is far too early to have any certainty around the second Trump administration’s policy agenda. On the one hand, tariff levels mooted during the campaign will likely be tempered in reality; on the other, winning the popular vote, all swing states, the Senate and the House gives the incoming government a clear mandate for radical change.

The immediate market reaction to the election result suggested a consensus that Trump will be positive for growth and nudge inflation and rates back up. However, we would question this narrative. A tough programme of tariffs may cause an inflationary bump in the short-to-medium term, but we think the chilling effect of such a policy – even in moderate scenarios – may be underpriced, given their potential impacts of business uncertainty, supply chain disruptions, and second order impacts on private sector investment and employment.

The above is an extract from our 2025 global outlook.