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Cash to extend reign as king of the asset classes, Citi says

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Investors are starting to see hoarding cash as more than just a fad.

The long-reviled asset is set to remain a favourite of money managers, according to Citigroup Inc. strategists, as Federal Reserve’s monetary policy threatens to tip the US economy into recession.

“Rolling recessions are likely coming and cash is becoming an increasingly attractive place to wait for opportunity,” quantitative strategists Alex Saunders, Dirk Willer and Hannah Sheetz wrote in a Tuesday note. “Cash looks like it is an alternative to investments in risky assets, with yields rising after every central bank meeting.”

Cash has been gaining in popularity as bonds tumble into a bear market and US stocks head for the worst year since 1928, leaving the classic 60/40 portfolios on pace for a record annual loss.

With money markets fully priced for Fed officials to deliver a 75 basis point interest-rate increase this week, higher deposit rates are actually making yields on shortest-dated instruments in fixed income — such as Treasury bills — more attractive, they wrote.

Citi’s Global Asset Allocation team said its cash position has been positive since May and its strategists’ model portfolio is overweight by 18% cash. The bank is part of a defensive chorus on Wall Street as traders hold back on deploying capital into riskier assets.

Of course, investors will want to start dipping into their cash pile eventually. There’s already a debate as to whether the Fed will start slowing its pace in December, though Fed-dated overnight index swaps are pricing a terminal rate around 5%.

But a comeback rally in risky assets will be slow to materialise, the Citi strategists warned, as those investments perform best in “late recession environments,” when inflation is subdued and major economic indicators stop declining.

“Currently we are in a stagflation environment as leading indicators have rolled over but inflation remains high,” they wrote. “This suggests US cash is a good place as traditional assets tend to post negative returns in these environments.”

© 2022 Bloomberg

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