Several articles and papers published last week discuss the growing attractiveness of cash vs. other asset classes. These include: MarketWatch, which writes, "Goldman Says Cash Will Be King;" Bloomberg, which posted the opinion piece, "Cash Rules Everything Around the Bond Markets;" and J.P. Morgan Securities, which discusses the topic in its "Short-Term Fixed Income 2019 Outlook." We review these "cash is back" stories below, and we also review the latest on pending European Money Fund Regulations and quote from a BlackRock publication on "Preparing for European Money Market Fund Reform." (Note: European regulators also finally rejected the use of the "reverse distribution mechanism," or RDM, which allowed for share cancellations in funds with negative yields, too. See below or see the FT's article.)
The MarketWatch article tells us, "Cash is king. That is according to Goldman Sachs strategists who predict that 2019 will deliver lackluster, single-digit stock-market returns, making greenbacks the best game in town. 'We forecast S&P 500 will generate a modest single-digit absolute return in 2019.... Cash will represent a competitive asset class to stocks for the first time in many years,' analysts at Goldman, led by David Kostin, wrote in a research reported dated Nov. 19."
It states, "On top of that, adjusting for the risk associated with owning equities, Goldman views cash as a better option. Analysts at the investment bank say that households, mutual funds, foreign investors and pensions funds tend to have an allocation to cash that ranks in the lowest percentile and while equity allocations tend to be in the 89th percentile on a historical basis."
The Bloomberg commentary explains, "What do strategists at two of Wall Street's largest banks, Goldman Sachs Group Inc. and JPMorgan Chase & Co., have in common with the legendary hip-hop group Wu-Tang Clan? For all of them, cash rules everything around. The easiest and safest investment has long been a loser in the post-crisis era. But with just about a month until the end of the year, cash and cash-like assets are pretty much the only area of the U.S. fixed-income markets set to deliver positive returns in a period that could end up being the worst for the broad market since 1994."
It adds, "It's not as if the appeal of cash came out of nowhere. The Federal Reserve has been steadily raising interest rates for almost two years now. In June, I wrote about how U.S. investors were flocking to money-market funds not in a flight to quality but because they were paying more than they have in years.... For some bond investors, the increase in yields across the curve has been a painful experience. But for those buying the shortest-dated maturities, the slow-but-steady climb is ideal because portfolio managers consistently reinvest at ever-higher rates.... Given this performance, Wall Street is starting to take a second look at cash."
J.P. Morgan's "Money changes everything" brief says, "As we look into next year, we think there are five ongoing trends that will shape the short-term markets. First, cash matters more than it has since before the financial crisis. Cash yields have risen enough that money market yields are increasingly attractive and money is moving into the money markets and short duration. This has important implications for short-term fixed income and for bank deposit rates."
It continues, "We expect the FOMC will hike the fed funds target range another 25bp to 2.25-2.50% on December 19, marking the ninth hike since the committee began rate normalization in December 2015. Nearly all of this bump will be reflected in money market rates and money market fund yields by the time the hike actually occurs. These hikes, while large in number, have only just recently pushed inflation-adjusted yields on cash-like investments to about zero. Still, given the negative total returns on most bond portfolios and very low returns and plenty of volatility in stocks, cash is looking good on both a real and risk adjusted basis. It turns out zero ain't nothing."
JPM adds, "Indeed, our economists expect the Fed to continue hiking in 2018 even as they expect headline CPI to average 2.0% over the course of the year. Real yields on cash are headed further into positive territory, and they already are a powerful force that is attracting assets and boosting demand for high quality, low duration investments. The high beta of rate hikes passed through in money markets is also allowing MMFs and ultrashort duration funds to effectively compete with stock and bond investments as well as bank deposits."
In other news, BlackRock's "Framework for the Future: Preparing for European Money Market Fund Reform" tells us, "Regulatory changes to money market funds (MMFs) are looming. The operational details of European Money Market Fund Reform (EMMFR) are still being analysed and debated, yet BlackRock has worked to provide a spectrum of products that fit within the new framework. Our goal: offer a variety of product choices to help clients meet their ongoing cash investing needs."
They write, "As the January 2019 implementation deadline approaches, it is now time to start considering your needs and taking any necessary preparatory action. In order to be well positioned when the transition occurs, we believe you should have a clear picture of the post-reform product offerings such that you can identify any amendments required to your investment policies, ensuring sufficient flexibility for the post-reform fund structures."
BlackRock tells us, "For many investors, little or no action will be required to accommodate these reforms. It is our goal to ensure that no matter what investment solutions you decide are best for you, we make the transition smooth and simple. Preparing sooner rather than later will help ensure your conversion is well-aligned to your needs. We share here some best practices and considerations to support you in this preparation."
They comment, "The negative interest rate in euros makes the CNAV and LVNAV structures dependent on continued regulatory approval of the Reverse Distribution Mechanism (RDM). As regulatory discussions about RDM are ongoing, BlackRock's 'Reform Centre' website is a useful source of up-to-date information on the topic. As part of our ongoing commitment to keeping you informed, we will continue to communicate proactively as decisions are made that impact our intended product offerings."
Finally, note that just early this morning, IMMFA's Jane Lowe issued a statement that "regulators would cease to allow the use of share cancellation (RDM) as an operational mechanism for handling money funds invested in negative yielding currencies," "It has taken an unusually long time for this issue to be concluded and to that extent we are pleased that investors and industry now have certainty. Nonetheless, it is a very disappointing outcome. Investors strongly value the use of constant NAV money market funds and it is unfortunate that an interpretation has been taken of this Regulation that will prevent a widely accepted practice from continuing in these funds. This ban has the perverse effect of blocking investor access to constant NAV money market funds in the core currency of the Union."
She adds, "Such a loss of choice and utility in euro currency funds is most unwelcome for users of the funds and for those, like ourselves, who are strong supporters of the capital market union. Our members are resilient, however, and have prepared and will offer other products to their investor base to make good the loss of the euro LVNAV distribution share class following from the ban on RDM." (See also the FT's "Key European watchdogs signal the end of 'share destruction'".")
Crane Data shows the following conversion dates for various European money fund managers: JPMorgan and Northern - Nov. 30, 2018; Federated and SSGA - January 11, 2019; Morgan Stanley, BlackRock and Western - January 14, 2019; and HSBC - January 16, 2019. Aviva has already converted its funds to LVNAV.
