The Changing Economies of Cash
Cash and cash equivalents in the form of Money Markets and Income Funds are a key component of many investment portfolios.
These provide a cornerstone of stability to portfolios in the short term, but come at the cost of lower, longer-term returns compared to risk assets (Bonds, Property and Shares), as well as greater Income Tax burdens.
South Africa’s move to a lower 3% inflation target represents a structural shift in the interest rate environment. Over time, it will reshape the economics of cash and liquidity investing for both individuals and corporates.
In the past, I have mentioned that whenever one thinks back over the last 20—30 years, lower inflation and interest rates have always been accompanied by a stronger Rand. And this is also true vice versa.
This is very much the case now, and, in turn, the then stronger currency supports the lower inflation being sustained for even longer.
For several years, South African treasurers and cash investors benefited from an unusually favourable backdrop of higher global inflation and interest rates, in which conservative cash strategies delivered strong real returns. That cycle is now turning, which is why we will most likely see the mantra of “cash is trash” back in the news headlines over the coming months.
As inflation expectations become anchored, stabilising at lower levels, nominal interest rates are likely to trend lower. This has direct implications for money market returns, liquidity portfolios and how risk is governed.
In his latest article attached, Quaniet Richards, as Head of SA Corporate Business at Ninety One, outlines what this transition means in practice for individuals and corporate treasurers, including:
- How a lower inflation target is likely to translate into lower short-term yields over time
- The impact on traditional cash and money market strategies
- When reassessing risk may be appropriate, and when preserving liquidity should remain the priority
- How to think about credit exposure, including selective opportunities within state-owned entities
- Why governance, transparency and realistic return expectations will matter more than optimisation
The environment of high real returns on cash is unlikely to persist under a credible regime of lower inflation. Preparing for this shift now will be far more effective than reacting later.
Ninety One Diversified Income Fund Manager Feedback and Overview
Over the last 18 months, I have highlighted the protection that Income Funds provide in a decreasing inflation and interest environment compared to traditional money market funds.
Income Funds are suitable for cash investors who are prepared to take some short-term Income Fund volatility in seeking to achieve returns of 1% - 2% per annum more than a traditional money market over rolling periods.
It should be noted that more value will be added during a declining interest rate cycle than during an increasing one.
In an increasing interest rate cycle, outperformance of closer to 1% per annum is realistic. In a declining interest rate cycle, this ought to be around 2% per annum, and in the past, it has been as high as 3% per annum, as many of our investors have experienced, depending on how far interest rates fall.
Last year, across most Income Funds in our industry, it was over 4% outperformance over money markets for the last calendar year, as some SA risk (only some, as there should be more to follow) has reduced in our Bond markets.
In turn, Ninety One’s Malcolm Charles, as lead fund manager of the Ninety One Diversified Income Fund, shares his summary and insights into his fund, which you can view by clicking on this link.
Many enjoy his very matter-of-fact speaking style.
Not only is this a further look at his fund, but it also provides investors not invested with a good background on how SA's improved trajectory is shaping up in the context of the global economic environment.
After a good year for local Bonds and his fund returning 12,7% for the 2025 calendar year, in the first 7 minutes, he shares where the added growth in his fund came from last year, and then he looks forward, sharing his insights and how he sees Bond markets evolving over the coming year.
From minute 13, he looks at global factors, including global inflation as led by the US, before, in minute 17, looking at what to expect this year from the local SA Bond market. Thereafter, having a good, intimate working knowledge of various government and quasi-government initiatives, he uses practical examples to show how SA is building momentum and how this impacts his environment.
From minute 21, he explains why, after two good years for local Bonds, he prudently believes the fund holdings can still deliver, given a yield of just under 9% in his fund at present.
In comparison, on the back of his anticipating 2 further 0,25% interest rate cuts for this year, this background also gives context for why he anticipates and believes the regular money market will deliver only around 6,25% for this calendar year.
Overall, the fund remains “constructive”, where there is “still some juice left in the tank”, as well as some further capital appreciation to be unlocked on top of the regular yields (last minute).
As much as this all applies to his fund, the overall logic equally applies to most Income Funds in SA.
FRIDAY FINISH LINE
