MARKETS & INVESTING
1 . Returns on cash have been low compared to other asset classes Broad markets indeed outperformed cash in 2023 . Cash return of around 5 % may appear attractive when compared to the historical cash returns in the period between the Global Financial Crisis and the Covid recession . But the real opportunity cost of cash stems from its relative performance compared to other assets , and these have been substantially higher in 2023 . Moreover , with the consumer prices rising around 3.5 % in 2023 , these nominal returns translate to only 1.5 % real return for cash . As cash rates are the fundamental building block for all asset class returns , an increase in cash rates lifts the total long-term expected returns across all markets : stocks , bonds and alternatives . Furthermore , the risk premia for government bonds and equity markets increased in 2023 , boosting their potential for outperformance in the future . It is important that investors should not evaluate investment opportunities ( such as cash ) in isolation but against alternative opportunities , and to consider the prospective real returns rather than nominal only .
Cash underperformed broad markets in 2023
2023 full-year returns
60 %
50 %
40 %
30 %
20 %
10 %
0 %
-10 %
-20 %
-11.2 %
China stocks
-3.8 %
Oil
4.1 %
US Treasuries
2023 asset class performance
4.4 %
Hedge funds
5.1 %
Cash
8.2 %
EM Europe
8.5 %
US IG
9.1 %
EM USD Corp bonds
13.1 % 13.4 % 14.1 %
Gold
US High Yield
UK stocks
14.1 %
Multi-asset portfolio
19.9 % 20.8 %
Source : Bloomberg , HSBC Global Private Banking as at 8 January 2024 . Past performance is not a reliable indicator of future performance
Eurozone stocks
India stocks
26.5 %
US stocks
32.7 %
Latam stocks
55.1 %
US Tech sector
2 . Major central banks are done with rate hikes Another important observation is that rate hikes are already behind us . At the time of writing , forecasters , markets and central bankers are all expecting no further interest rate increases from their current levels . Money market futures are implying approximately six 0.25 % cuts by January 2025 in the US and Eurozone . We expect interest rate cuts to commence from the middle of 2024 . This means that the cumulative return from holding cash over any relevant time horizon is unlikely to match the current level of annualised yields .
Expected rate cuts become a tailwind and returns on cash holdings will start to fall
Policy rate (%)
6 5 4 3 2 1
Federal Reserve ECB Bank of England
0
Source : Bloomberg , HSBC Global Research , HSBC Global Private Banking as at 19 December 2023 . These are our forecasts which are subject to change
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