Cash is king for investor portfolios right now, according to Morgan Stanley

Published Mon, Aug 22 20221:36 PM EDT

For the last 12 years or so, holding cash in a portfolio was largely seen as an insurance policy, a way to get through tough times. That view is no longer accurate, according to Morgan Stanley. Not only is cash no longer a drag on portfolio yields given where bonds stand, it's slated to perform better than many other asset classes. "It offers a high current yield. It offers liquidity. If offers a better 12-month total return than our strategy forecasts imply for US equities, US Treasuries and either US IG or HY credit (with considerably less volatility)," Chief Cross-Asset Strategist Andrew Sheets wrote in a Sunday note. Because of this, Morgan Stanley is generally overweight short-dated fixed income in its Core+ optimized fixed income portfolios. U.S. cash also outperforms other currencies, and should continue to be strong, according to the bank. Looking for yield Looking ahead, Morgan Stanley will monitor the risk of outflows caused by high yields on short-term safe assets, which make it cheaper for investors to sell out of the market, according to Sheets. "For the moment, we are more relaxed about outflows, given strong consumer finances, better recent cross-asset performance and the simple fact that terrible 1H performance didn't trigger a rush for the proverbial exits," he wrote. One factor that may be limiting outflows is that not all cash is the same – currently, U.S. 6-month Treasury bills yield about 3.1% while yields on 6-month U.S. bank CDs are less than 1% and the average for a US bank savings account is 0.13%. "For gathering assets and adding yield, it seems like an unusually good time to add value with money market strategies," Sheets wrote, adding that it also raises interesting questions around bank net interest margins. The last time that German bill yields were positive, the price to book ratio of EU banks was 57% higher, he said. To be sure, there is one asset class that Morgan Stanley does see outperforming cash this year – emerging market sovereign debt. The bank recently raised its rating on that asset class to overweight. Still, "the market is giving investors the opportunity to earn ~3% on safe, liquid T-bills, or ~5% on safe (but less liquid) short-duration CLO AAAs, and somewhere in-between for other AAA securitized paper that has cheapened as banks have faced RWA constraints," Sheets said, referring to risk-weighted assets. "These aren't the most exciting investments, but sometimes it makes sense to take what the market gives you."