We expect cash to under-perform

We expect cash to under-perform


We expect Cash to start under-performing bonds and equities as we move into the second half of this year and conclude that investors would be wise to start reducing their cash and invest more towards Bonds and Equities for the longer term over the next few months.

In particular:

Key inflation measures have started to fall and with that trend so will interest rates over the next 6 to 12 months causing the value of holding Fixed Interest assets such as Bonds to rise, the potential for which would far outstrip the interest earned on a Cash deposit.

Lower inflationary pressures should improve economic conditions, lift consumer confidence, and help increase corporate earnings lifting the value of Global Stock markets.

The Pound has gained in strength against most of the major currencies through 2023.  As a result, Sterling’s gain has negated the capital gains made when investing in overseas markets during 2023. More recently, the Pound has stalled and when viewed in a long-term chart, Sterling remains in a steady decline against other major currencies.  Should the Pound continue its downward trend then overseas investments would gain in currency terms.

The attraction of Cash

Given current deposit rates one can easily see the attraction of holding Capital in a Cash Deposit Account, particularly since the start of 2023, interest rates have yielded more than other investments such as Bonds (i.e. Gilts or Corporate Bonds).

We all know that the benefit of hindsight can be a futile exercise, so the challenge is to determine not, what you should have done but rather what you need to do now to ascertain how best to manage your investments going forward.

This paper will focus on three investment aspects, namely:

  1. Interest Rates and Inflation
  2. Global Stockmarkets, and
  3. The Pound

For ease we have placed various charts within the appendices.

Interest Rates and Inflation

As the world re-emerged from Covid there was a dramatic increase in consumer demand for goods and services.  This caused a global supply shortage as companies (and economies) were slow to restart their manufacturing capacity.  The sudden spike in demand could not be easily met due to structural problems within the global supply chain which prevented the smooth transportation of goods and services to meet that demand.  This caused the price of goods to rise thereby fuelling inflation.

In response Central Banks around the world were forced to raise interest rates for fear that if they failed to act, the world would suffer a severe and prolonged economic slowdown.  As we in the UK know only too well, this has created great hardship, especially amongst young homeowners and those less well-off who have struggled to make ends meet as energy prices and food costs have soared.  A problem further compounded when Russia invaded Ukraine in February 2022.

To illustrate the impact on inflation, it is worth studying the wholesale price that manufacturers must pay to create their goods for sale. This measure, known as the Producer Price Index or PPI for short, is a key determinant in measuring inflation.  If the cost of manufacturing goods rises this increased cost must invariably be passed onto the consumer, thereby fuelling other inflationary pressures such as the Consumer Price Index (CPI).

Around the World the Producer Price Index rose dramatically during 2022, especially in Europe where year on year manufacturing costs had risen by almost 50%.  These costs have now fallen by 100%, in the case of Europe this has fallen by 108% since mid-late 2022 as can be seen in the PPI charts shown in the Appendix 1.

This bodes well for manufacturing companies going forward given that their costs have fallen so dramatically, this should lift their profitability and in turn their share price.  We are starting to see evidence of this in the latest round of publicly quoted company earnings.

We would expect the fall in PPI to feed its way into the consumer as measured by the Consumer Price Index.  Normally there is a lagged effect which can usually take between 3 to 6 months depending on the type of manufacturing or service sector.  We are seeing evidence that consumer prices have started to fall, and we would expect this trend to continue throughout the rest of 2023 and into next year.

Which brings us to Interest rates.  Whilst one can expect there to be a delay in cutting interest rates until the Central Banks are confident that inflation is under control, the markets are starting to price this in and are expecting this to happen if not by the end of the year, then early in 2024.  As we write this article four major UK banks have just announced a reduction in their fixed rate mortgage offers, this would imply that they are also expecting interest rates to reduce over time.

So why is the interest rate cycle important for investors?  As stated earlier, investors would be wise to start reducing their cash and invest more towards Bonds and Equities for the longer term. The rationale being that as interest rates start to fall Bonds and Equities should (logically) both rise in value.  The importance being that the investor who remains in Cash will likely miss this opportunity.

Global Stockmarkets

When considering investing in the Stock market the price one pays is a function of what you can expect to receive by way of dividends and over time, the growth in the earnings that the company will make which leads to more profitability and in turn further dividends that the company can declare.

Which is why most investment analysts will start with a valuation to ascertain whether the current share price of companies listed in the stock market offers fair value.  This needs to be explained in the context of what is normally viewed as a “fair price” based on long term historical data.  We know from our research that most global stock markets, when expressed as a multiple of the company’s earnings, are being priced below their long-term average price.  Many of the major markets are currently being priced between 20% to 35% below their historical average price. 

Yet at the same time the companies that make up those markets are seeing their earnings grow significantly.  If one were to combine earnings growth with a reduction in the cost of manufacturing, as stated above, then one can see companies, particularly in the manufacturing sector declaring higher profits in years to come.  Which in turn should lift share prices.

Other investment analysts will review the strength of a given stock market from a technical, or trending perspective.  The assumption being that if a Stockmarket is in a strong upward trend then that trend is likely to continue and so gains can be made. 

A simple way to determine whether a stock market is in a strong or weak trend is to plot a stock-market’s performance chart and overlay the price chart onto the average price for the last 40 weeks or 200 days as a simple moving average chart.  The inference being that if the current price is higher than the average price for the last 200 days then the current trend would appear to be in a strong position.  The reverse being true.

We have included in Appendix 2 a range of charts to illustrate how global stock markets are currently positioned from a technical or trending perspective.  We conclude that with the except of the UK and China most other stockmarkets, particularly in North America, Europe and Japan are in strong upward trends.

The Pound

When studying the performance charts across global stockmarkets (see Appendix 2) one must be mindful that performance is shown to the exclusion of any currency exposure.  As a UK investor, the chart shown below illustrates the impact Sterling can have when investing abroad and is an important consideration when valuing one’s investment(s) in Sterling.

The chart plots the performance of the leading US Stock market index known as the S&P 500 as shown in Red.  The same chart also shows the performance of the same index but this time repriced in Sterling (GBP).  It can be clearly seen that up until March 2023 both indices were closely aligned.  However, from March 2023 there was a marked disparity as the sterling-based fund underperformed by circa 6% in a little over 3 months. 

Whilst there are some small discrepancies in the way both instruments are constructed these differences are very slight and so one can conclude that the performance differential was almost entirely due to the Pound increasing in value against the US Dollar.  In this case by almost 6% since March 2023.

The final chart may help explain our longer-term strategy when considering the Pound which explain why we favour investing more abroad.  As can be seen below this chart plots the performance of the Pound versus the US Dollar over the last twenty years using a long-term monthly bar chart.

We would therefore draw the following conclusions:

  • As can be seen the Pound almost reached parity with the US Dollar in late September 2022
  • This was in response to the announcements made in Kwasi Kwarteng’s mini budget. 
  • Since then, it has recovered though it has still to get back to its recent peak in early 2021.
  • The longer-term chart would imply continued weakness and is shown to be in a downward trend.
  • This would seem logical when combined with other economic forecasts from leading research bodies.
  • Were the Pound to reverse its recent uptrend and start to turn lower, overseas investments would gain in currency terms.


If, as we would expect, inflation measures were to continue falling this would enable the Central Banks to reduce interest rates in the coming months.  As interest rates fall so the value of holding Fixed Interest assets such as Bonds should rise, the potential for which would far outstrip the benefits of holding a Cash deposit.

Equally, with lower inflationary pressures economic conditions should improve, thereby helping lift consumer confidence and help increase corporate earnings.  Stock markets are known to act as a leading economic indicator, often rising in value before an economy has fully recovered from an economic slowdown.  Often stock markets will pre-empt economic conditions and thereby lead a recovery with an average lead time of between 6 to 12 months.  Hence, the thought that Stock markets could rally through the second half of 2023 would fit with an economic recovery in the second or third quarter of 2024.

Which leads us to conclude that Stocks and Bond markets should start to outperform cash through the second half of 2023 and that a prudent strategy would involve moving cash progressively into Stock and Bond markets over the rest of this year. Furthermore, as evidenced by the charts shown in this paper, one should look to invest Globally in the hope that economic conditions abroad should offer greater potential rewards to a UK investor, further aided by currency gains against Sterling in the longer term.

Disclaimer: ‘Where the business has expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. The information contained within this communication is believed to be reliable but Realm Investment Management Limited does not warrant its completeness or accuracy.

This communication is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell investments.’

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