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Cash is King?

2 June, 2017

Amidst the current volatile market conditions, it's easy to feel safe hiding your savings in bank deposits. After all, with minimal risk of losing your capital, everything seems fine.

In other words, 'cash is king.' Or is it?

Unfortunately, even in the current low inflation environment, this adage does not hold true.

LOW DEPOSIT RATES + INFLATION: A DOUBLEWHAMMY

 

Low Cash Return

Banks are offering very low deposit rates due to the abundance of money supply. In fact, the yield on cash deposits is quite low. For example, rates on saving deposits in Asia generally do not exceed 1%1 . This does not bode well for the growth of your savings.

Inflationary environment

The global economy is still recovering. Inflation has gradually increased over the past year as oil and commodity prices rebounded.

As a result, the price of goods related to oil, such as petrol, are also increasing. An increased petrol price means that you have less in your budget to purchase other items.



WHAT ARE REAL INTEREST RATES? 

 

For depositors, the real interest rate can be interpreted as the bank deposit rate minus the rate of annual inflation.

Real purchasing power matters

In a number of countries and regions across Asia, real interest rates today are extremely low - even negative in some cases. When real interest rates are negative, the real purchasing power of your money is decreasing over time, and holding cash over sufficiently long periods can compromise your saving objectives.

Inflation erodes the purchasing power of your money over time. But you can take steps to protect your wealth. By shifting a portion of cash in bank deposits to other investments that earn more, you may potentially earn more without taking on excessive levels of risk.

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In other words: Inflation has eroded the purchasing power of your money.

 

Real Interest Rate (Deposit) in Asia1

 

Data as of 31 July 2018. Real interest rate (deposit) in Asia are constructed by subtracting headline CPI inflation from a 3-month time deposit rate.

EQUITIES AND BONDS HAVE POTENTIAL FOR HIGHER RETURNS 

 

Investment returns for equities and bonds have varied over the past decade (2007-2016). As an illustrative example, Asian equities and Asian bonds delivered 48% and 65% cumulative returns, respectively. This translated into compound annual returns of 4.0% and 5.1%, respectively2 .

History suggests that equities and bonds, despite higher risk and variability of returns than cash, have better potential for higher returns over the long term3 .

In a survey conducted in eight Asian economies, Manulife Asset Management found that cash and deposits account for as much as 43% in portfolios of investors within the region4

Investors hold 43% cash in the region 

It is suggested to review your current investment holdings and future financial goals with a financial advisor. You may be currently holding excess cash. Other investment options may potentially provide a higher real return within an acceptable risk level.


1 Source: Bloomberg, websites of Asian central banks and major banks; Data as of 31 July 2018.

2 Source: Bloomberg, as of 31 December, 2016. Asian equities’ return is represented by the MSCI AC Asia (ex-Japan) Gross Total Return USD Index. Asian bonds’ return is represented by 50% JP Morgan Asia Credit Index +50% HSBC Asian Local Bond Index (2007-2012) / Markit iBoxx Asian Local Bond Index (2013-2016). All returns in US dollars. Compound annual returns represent the compound annual growth rates (CAGR) of the respective indices during 2007-2016.

3 Cash refers to 0-3 month Treasury Bills, as represented by BofA Merrill Lynch 0-3 Month US Treasury Bill Index. The cumulative return of the index from 2007 to 2016 is 7.4%.

4 Source: Manulife Investor Sentiment Index, 4Q 2016.

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