HNW Investors' Cash Love Affair Creates Dangers – Capital Group

Amanda Cheesley Deputy Editor 28 March 2024

HNW Investors' Cash Love Affair Creates Dangers – Capital Group

The survey shows that investors could miss out on market opportunities because of their high cash exposures. The rise in interest rates have changed the mentality around asset allocation.

A new survey by Capital Group, a Los Angeles-headquartered fund manager, reveals that 78 per cent of global high net worth investors have relatively large cash holdings. And the firm reckons that's building potential trouble.

Reserved about getting invested, almost half of the global HNW investors now consider bonds to be as risky as equities. Among the reasons cited for concern over the next 12 months include a fear of higher volatility (60 per cent), faster inflation (56 per cent) and rate increases (41 per cent), the survey shows.

“It’s easy to be parked in cash, but we believe that perhaps the biggest market risk today is holding excess cash,” Alexandra Haggard, head of asset class services, Europe and Asia, Capital Group, said. “Cash rates historically decay quickly after the peak in central bank rates, hence for high net worth investors, having too much cash in a portfolio could hinder their long-term wealth generation,” Haggard added. “History has shown that fixed income and equity outpaced cash after the Fed finished hiking rates. Taking a long-term view, we believe now is the time to make the shift out of cash.” 

Rises to global interest rates in the past two years, ending more than a decade of ultra-low rates, have forced a major shift in asset allocation. With the "risk-free rate" - typically measured by yields on US Treasury bonds - rising, it means the need to hold riskier assets to keep pace with inflation is reduced. It also means holding cash or cash-like instruments appears more attractive than a decade ago. But as Capital Group argues, that holds dangers because investors may be forgoing returns.

In its findings, Capital Group's report said that while geopolitics are seen as a major risk, causing 55 per cent of global investors to be increasingly uncertain about where to invest, there is longer-term optimism. Sixty-three per cent plan to invest more in equities over the next 12 months, with one-third globally and 48 per cent in Hong Kong citing good value as a reason for the increase. Investors are also considering increasing allocations to bonds (49 per cent) within a year, with a bias towards higher quality fixed income.

Ninety-six per cent of Hong Kong HNW investors favour government bonds, in alignment with 90 per cent of global investors. While investors surveyed in Singapore favour high yield bonds compared with 85 per cent globally, 84 per cent globally veer towards investment-grade corporate bonds.

Among the HNW investors surveyed, globally 58 per cent expect fixed income and equities to be less risky than cash because they believe that they can beat inflation over the next 10 years. Among HNW investors in Singapore, this sentiment increased to 68 per cent.

“Despite the macro uncertainty, this environment still presents opportunities for long-term investors focused on fundamentals,” Scott Steele, fixed income asset class lead, Europe and Asia, Capital Group, said. “Bonds play a central role in a well-diversified portfolio and the expansive global fixed income market presents broad sources of yield, risk factors, and returns. The return of income to fixed income means that investors can benefit from putting cash to work in high quality bonds with attractive yield for potential future income.” 

With offices in the Americas, Asia and Europe, Capital Group has assets under management of more than $2.5 trillion.

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