Cash now a ‘dead’ asset
With the Reserve Bank of Australia (RBA) expected to keep the cash rate low for the next few years, cash will be a “dead” asset and investors will have to take on more risk in their defensive assets, according to Fidelity.
Anthony Doyle, Fidelity cross-asset investment specialist, said to generate a return similar to what was previously enjoyed by Government bonds or cash, investors would need to take on more risk.
“We are drinking the quantitative easing punch with everyone else and as a result what you’re likely to see is yields continue to compress,” Doyle said.
“This will be the dominant force for the next decade and it’s exactly what central banks want you to do – they want to punish savers and reward borrowers.
“They want higher asset prices, all in order to generate higher growth, lower unemployment and higher wages, and therefore higher inflation in the medium to long-term.”
Doyle said central banks targeted price stability and inflation with the RBA usually targeting 2% to 3% inflation, which was no longer going to be the case in the near future.
“Ultra-low cash rates I believe are here to stay – the RBA told us at their last meeting for the year – that the cash rate isn’t going to move in the next three years,” Doyle said.
“That is an environment where savers are going to be punished for putting their money in deposit accounts with a bank or term deposits.
“Especially if we see inflation higher than the cash rate today which is only 0.1%; if inflation is higher you will actually be going backwards in inflation adjusted terms.
“If cash yields nothing and inflation is 5%, when you take your money out in a years’ time, the value of that investment is down 5%.”
For this reason, Doyle said that was why investors were increasingly moving out of cash into asset classes which would generate a positive real yield.
“One thing Australian investors have to become aware of is that when interest rates get to those very low levels after a recessionary environment or crash, like the Global Financial Crisis (GFC) or COVID-19, they tend to remain at these very low levels for a considerable period of time,” Doyle said.
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