Cash is starting to feel safe again, and that’s precisely why it deserves a closer look.
Central banks are changing the investment backdrop
Major central banks are delivering a consistent message. The Federal Reserve kept rates unchanged at 3.50%-3.75% last week, while warning that inflation uncertainty is increasing.
Meanwhile, both the Bank of England and the European Central Bank have also paused, as they evaluate the effects of renewed pressure from energy markets.
In Australia, policymakers have already taken a different path, lifting rates again to 4.10%.
As I was quoted by Daily Telegraph and Stockhead, amongst others, at the start of the year, markets were counting on a smooth run of rate cuts, but that outlook is now being challenged.
A fresh inflation risk has surfaced at a particularly inconvenient time. Oil prices have jumped above $110 a barrel amid escalating tensions involving Iran. Higher energy costs quickly ripple through transport, food, and production. Inflation doesn’t need to spike dramatically to become a concern again.
Inflation continues to exceed targets across much of the developed world. In the US, core inflation hovers around 2.5%, and expectations are beginning to creep upward.
In the UK, inflation is near 3%, while wages are still growing above 4%. In the eurozone, services inflation remains over 3%. Australia’s inflation, close to 4%, also sits above the central bank’s target range.
Policymakers are proceeding carefully. Interest rates are already high and are likely to remain elevated longer than anticipated.
This sets up a unique environment. Interest rates aren’t climbing rapidly anymore, but they aren’t dropping fast either. Economic growth is slowing, yet not imploding. Labour markets are cooling, but remain operational.
Why cash looks attractive, but has limits
In this context, many investors are turning to cash. After years of minimal returns, savings accounts are once again providing yield. At first glance, that seems like a reasonable move.
The issue is that cash only looks appealing when considered on its own.
Cash provides a fixed return, but inflation determines its real purchasing power.
With inflation hovering between roughly 2.5% and 4% in major economies, the potential for genuine gains is limited. After taxes are factored in, many investors are barely maintaining nominal value.
Balances may grow, but purchasing power hardly improves.
Cash also has little upside. It doesn’t gain from shifts in the interest rate cycle, when rates eventually decline, cash yields drop as well. There’s no boost from price appreciation and no way to lock in current conditions.
Other assets, by contrast, provide that kind of flexibility.
Government bonds are now offering yields unseen in over a decade. Investors can lock in income at today’s levels and potentially gain from price appreciation if rates decline in the future. Investment-grade corporate bonds add an extra premium, backed by generally strong balance sheets.
Equities, of course, continue to play a key role for discerning investors, especially in sectors where companies can pass on rising costs. Firms with pricing power are better positioned in a world where inflation remains uneven rather than vanishing.
Adapting now matters more than waiting
In addition, sectors tied to infrastructure, energy, and industrial activity stand to gain from ongoing nominal growth.
There’s also a strong argument for assets that react directly to inflation. Commodities and inflation-linked bonds offer exposure to the very forces that erode cash’s real value.
In times when geopolitical tensions can swiftly disrupt supply and prices, such exposure becomes increasingly valuable.
The goal isn’t to abandon caution, it’s to acknowledge that the factors that once made cash appealing have shifted.
Cash performed well when central banks were raising rates rapidly. Returns climbed quickly, and there was little incentive to commit to longer-term assets. That phase is now behind us. Rates are nearing their peak, and the focus has moved to how long they will stay elevated and what comes next.
Markets usually anticipate central bank moves. Bond prices often climb before rate cuts start, and equity markets respond to expectations rather than waiting for confirmation. Sitting in cash until everything is certain often means acting too late.
Holding too much cash in this environment carries obvious risks. It locks in current yields but misses out on potential future gains, leaves investors vulnerable to inflation, and depends on timing decisions that are notoriously difficult to get right consistently.
Of course, cash still plays an important role, offering stability and flexibility and helping to navigate short-term uncertainty.
However, relying on it as a primary strategy for preserving and growing wealth is becoming harder to justify.
The global economy is entering a new phase. Inflation has moderated but remains above target and susceptible to renewed pressures. Central banks are taking a cautious approach, signalling patience rather than urgency. Interest rates are high, but no longer climbing rapidly.
Opportunities are available across markets for investors ready to adapt to this new reality.
Cash is no longer king.
To read my previous blog post, click here.