Bull Market in Cash
Friday, March 3rd, 2023 Categories: Cash, FX rates, US Treasuries
Bonds are not the best hedge for equities
The 40-year bull market in bonds is over and investors will have to adapt. We argued last time that cash should have a much more important role as the risk-free asset against which all investment propositions are evaluated. This week, we look at how cash has interacted with equities and government bonds over the last two years. We find that a three-asset portfolio, using our standard process, has significantly outperformed our standard equity/bond model, in both the US and Europe. Returns are higher in both absolute and relative terms and drawdowns are much lower. We think investors should consider raising their benchmark cash weighting to somewhere between 15-20%, with a pro-rata reduction in both equities and bonds. Some of this new cash weighting could be held in foreign currency.