Cash vs Equities in 2010...6 Months Later.
Jul
6
Written by:
7/6/2010 9:04 PM
Time is flying by and June 30
th been and gone. As such I thought it fit to revisit the
article I wrote at the start of the year discussing whether cash had overtaken equities as the investment of choice for 2010. While Europe's debt woes, the United State's slow recovery and China growth concerns have thrown oversize spanners in the works for equity investors (some may say these spanners only unlock great bargains), the effect on wholesale funding for banks has resulted in a continuation of great returns for cash investors, albeit at a slighter lower rate of return in some cases.
At the start of the year we were in the middle of a “perceived” rapid recovery with expectations of continuous rate rises and many an economist predicting a cash rate of 5% or more. Earnings too were expected by many to be on the rise, leaving many discussing whether to invest in cash or equities in 2010. It took only months however for the world economic concerns mentioned above to change the perceptions and expectations of must pundits.
Cash investments in January 2010 were offering returns up to 6.80% for 12 month terms. Although lower at the time of publishing this blog, returns for term deposits and “at call” accounts of 6.0% or more have been available throughout 2010 don't look like dropping in the near term.
Australian banks have for a long time relied on cheaper wholesale funding from overseas markets, however with credit still tighter than pre-crisis levels, their cost of funding remains high (simple supply and demand). Banks continue to offer high rates of return on cash investments in an effort to reduce their reliance on the highly competitive and expensive overseas wholesale markets. The end result is a continuation of high rates of return on cash investments in Australia. For those of us who invested in cash through January 2010 would currently have made returns of over 3% to date.
On the other hand, the ASX 200 opened its first trading day for 2010 at a level of 4865 and tested the 5000 level on a number of occasions before tumbling to a low of 4176 late in May. On the last day of trade for financial year 2010 the ASX 200 closed at 4302, a drop of 563 or 11.57%. As it stands after six months, cash is outperforming equities by over 14%.
Unfortunately for equity investors, the global recovery has not taken off as quick as first thought. The United States continues to bring out mixed data each month, with employment and wage figures lacking the strength needed for a consumer driven recovery. European debt woes has fuelled major concerns over how governments are going to manage a recovery whilst maintaining their own ability to pay the enormous amounts of debt they have found themselves in. China's economy has weighed in with concerns over the sustainability of their GDP growth in the future. All these issues have resulted in further volatility fuelled by seemingly endless fear and uncertainty around the world economic recovery.
One can argue that equity investments should be considered a long term investment with a time horizon of at least 5 years. There is no real argument against this, however our previous article and this blog do show how attractive current cash investments are proving in times of uncertainty. The point of our original article and this blog isn't to ignore the benefits of long term dollar cost averaging of equity investments, it is merely discussing the short term performance of cash and equity investments. What it does do is reveal the impact timing has on equity investments and if anything simply reinforces the merits of a longer
term view to investing.
One thing that cannot be argued is that cash has so far provided far better returns than equities in 2010. However, only time will tell whether the trend will continue through the remainder of 2010. With the reporting season soon upon us, we may get some indications of what to expect shortly out of equity markets as the world looks for signs of strength in the economic recovery.