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Swiss banking Higher rates remove need for cash comfort blanket

The case for cash has been compelling, at least until now


A striking feature of global financial markets since the crises of 2007 and 2008 has been the propensity of many wealthy private investors to sit out the turmoil, holding cash in bank accounts rather than in riskier assets. Might that be about to change?

The word among bankers in conservative Switzerland - the world’s largest centre for cross-border private wealth management - is that it quite possibly might.

Bank results season has been punctuated by optimistic comments to the effect that US economic growth under President Donald Trump, market euphoria, the return of inflation and central bank moves towards raising official interest rates will finally persuade clients to put their money to work.

“Nobody wants to be sitting on tons of cash. There would be a huge opportunity cost,” says Boris Collardi, chief executive of Julius Baer.

UBS, meanwhile, has reported “more questions on how to redeploy cash”, says Mark Haefele, chief investment officer. “We’re getting more questions on how to redeploy cash. The corrosive power of inflation on cash is increasingly a topic. There is only so long that investors can worry that the world might end tomorrow.”

A large pool of cash

A significant shift out of cash would support rallying markets; it would also be good for Swiss banks’ profits. Their cash holdings, which typically make up a quarter of rich clients’ portfolios, might be a good barometer of private investors’ animal spirits.

The correlation with bank earnings is probably even better. So it is not churlish to suggest that the idea of a big switch out of cash is wishful Alpine thinking.

Funds held as cash mean no profits can be earned trading on clients’ behalf. Worse, with negative interest rates banks have ended up subsidising deposit holders.

Nevertheless there is clearly a large pool of cash waiting to be deployed. The 2008 collapse of Lehman Brothers not only burnt investors; it also caused worries about the stability of the financial system. Cash kept safely in bank accounts became a comfort blanket.

The propensity to hold cash remained remarkably steady. Central banks averted a global economic collapse but their efforts to re-stimulate risk appetites were less successful. As they embarked on ever more exceptional policy steps, policymakers assumed that historically low and even negative interest rates would drive investors to riskier assets. In fact the opposite happened.

In 2015, the latest year for which data are available, cash accounted for 28 per cent of affluent US investors’ portfolios, up from 25 per cent a year earlier, surveys by BlackRock show. Cash holdings in Europe and Asia appear to have been steady over the same period at about 40 per cent and 37 per cent. Whatever polite Swiss bankers whispered into clients’ ears, holding cash made sense amid deflation fears. Economic and geopolitical uncertainty were further reasons to play safe.

Awaiting action

And now? It is hard to find evidence that Mr. Trump’s election as US president has made much difference. UBS says cash still represented 22.6 per cent of invested assets in its main wealth management division (excluding UBS Wealth Management Americas) at the end of last year. That was down from 24.6 per cent three years earlier, but the pattern in the second half of 2016 was essentially flat.

Sergio Ermotti, UBS chief executive, has noted the optimism in US markets but he told Bloomberg recently that investors were still awaiting “concrete actions” by the new administration. “If you look in general outside the US, I think the situation has not really changed a lot.”

Still, it is not unreasonable to assume that the factors that persuaded investors to hold cash will reverse in 2017. As Mr. Collardi argues, higher interest rates “could trigger . . . the unfolding of the negative cycle that we went into with negative interest rates”.

Deflation fears, meanwhile, are giving way to worries about inflation while turbulent geopolitics has become the norm. With cash holdings so high, clients of Swiss wealth managers would not need to splash out much for financial markets to feel the effects.

Copyright The Financial Times Limited 2017

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