Wealthy investors worldwide are holding high cash reserves, which is spoiling business for private banks. However, there's more to it than that.
A recent survey by American investment giant Capital Group concluded that 78 percent of high-net-worth individuals maintain substantial cash reserves.
According to the study's authors, responses were collected from 450 wealthy investors from around the world—including the USA, Asia, European countries outside the EU, and Switzerland—with assets of at least $1 million.
Significant Losses in Commission Business
Swiss private banks felt the impact last year. In addition to the strong Swiss Franc, it was this flight to cash that caused their revenues from commission-based business to collapse. As a result, firms like Pictet, Vontobel, or Lombard Odier ended the year with lower profits, while overall asset growth generally remained in the single digits, as shown by a recent finews.asia analysis.
There are various reasons for this development. In addition to geopolitical uncertainties, there are monetary reasons: since the interest rate turnaround, returns can again be made on cash, and at a perceived low risk. Moreover, the uncertainty remains high. This leads to a majority of investors considering cash and money market funds to be as secure as corporate bonds.
Data Shows: Cash Deposits Yield Less
According to Marco Büchler, head of Capital Group in Switzerland, this is a mistake: «Investors holding a large percentage of their savings in cash or money market funds risk missing out on the potential for substantial gains in the bond markets,» he said in an interview with finews.ch. According to Büchler, investors held a record $10 billion in money market funds in the third quarter of 2023.
Büchler refers to the development of the last five US interest rate cycles. Three years after the peak interest rate, cash deposits had an average return of 15 percent, while corporate bonds yielded 32 percent. «Being active in the market is therefore more important than waiting for the ideal time because there is no such perfect timing,» Büchler emphasized, adding: «In the first ten months after the last rate hike, more than a third of this return is generated.»
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Being in the Market Is More Important Than Timing
The markets for European and Asian bonds show the same patterns as the American ones. Many investors today consider instruments close to money markets as safe havens. Büchler: «Certainly, one can wait until the economy becomes more predictable and the financial markets stabilize. However, we believe this could prove to be a fallacy,» he said. «It's not important to wait for the right moment, but to be in the market. This is especially true for high-net-worth individuals, as they also have more at stake,» Büchler continued. Data would show how much waiting could cost (see graph).
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Further, according to Büchler, a look at the past shows:
- The end of interest rate hikes is an exceptionally good entry point for bonds.
- Today, lucrative returns can be secured and even benefit from further interest rate cuts. Büchler: «Those who rely on the money market may have to settle for falling returns in the coming years. Bonds are more promising. The time for reallocations has come,» he emphasized. This is particularly true for investors who want to expand their portfolios.
- US election years are generally a good time for investors. «Whether Democrats or Republicans win in November in the USA, it will leave no lasting mark on the stock markets,» Büchler said.
Thematic Funds Disappoint
Moreover, a correction regarding thematic funds has occurred. These have gained a lot of momentum in recent years. However, many investors have also been burned. «Funds with only a few titles and a limited horizon are much more susceptible to price corrections,» Büchler stated. Capital Group has never entered this business. Büchler: «We pursue a broader approach. This doesn't mean we're not focused on profits, but on those of tomorrow rather than the short term.»
Capital Group is one of the oldest and largest investment managers worldwide. In Switzerland, the company has been present for over 60 years: the first branch outside the USA was opened in Geneva in 1962. Capital Group employs more than 130 people in Switzerland.
