For 3 years now cash has been masquerading as the King.  But I am sad to announce,  “the King is dead, long live the King!”  The reason I say masquerading is the fact that cash can never rule for long being too soft to protect investors against the enemy, inflation.  Like any King who cannot protect his subjects his rule is short lived.

South African investors enjoyed the benefit of high interest rates, which allowed for lazy investing as cash rates offered a secure return above inflation.  For international investors cash has been trash for years now with developed market interest rates set at zero.

Developed market central bankers have been able to follow a zero-interest rate policy with the objective of promoting growth as there has been no inflationary pressure. The consensus “lower for longer trade”, which has driven investment markets is premised on low growth, low inflation and low interest rates being maintained for a long time to come, but now there appears to be a change in thinking termed the “reflationary” trade.

The reflationary trade is based on the expectation of a weaker dollar, stronger commodity prices and most importantly higher bond yields, which has massive implications for investment markets underpinned by a lower for longer thesis.

The lower for longer proponents will argue that inflation is not a threat based on what happened in 2008 when extensive monetary stimulus reflated assets prices without feeding through to inflation, however this time does appear to be different with massive monetary and fiscal stimulus direct to the consumer like to push through to the cost of goods and services driving inflation.

The recent modest rotation out of mega-cap growth stocks in favour of cyclical value shares after a decade of relative underperformance is an early warning sign for global investors waking-up to the threat of future inflation.   There will be plenty of money to be made and / or lost as the reflationary trade gains momentum.


Mark Williams
Mcomm, CFP®, HdipTax
T. 021-205 1133

Cash is now showing itself to be trash
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