Swiss signals that cash may no longer be king

A striking feature of global financial markets since the crises of 2007 and 2008 has been the high propensity of many wealthy private investors to sit out all 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.

The annual bank results season has been punctuated by optimistic comments about how US economic growth under US President Trump, market euphoria, the return of inflation and central bank moves towards raising official interest rates would finally persuade clients to “put their money to work”.

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

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

A significant shift out of cash would support rallying markets; it would also be good for Swiss banks’ profits. Cash holdings at Swiss banks, today typically a quarter of rich clients’ portfolios, may 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 the idea of a big switch out of cash is wishful Alpine thinking.

Funds held as cash mean no profits to be earned trading on clients behalf. Worse, the imposition of negative interest rates means 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 saw investors being burnt by losses; they worried about the underlying stability of the financial system. Cash held safely in bank accounts became a comfort blanket.

Subsequently, the propensity to hold cash remained remarkably steady. Central banks averted a global economic collapse but their efforts to rebuild risk appetites were less successful.

As they embarked on ever more exceptional policy steps, central bankers assumed historically low and even negative interest rates would drive investors into riskier assets. In fact, the opposite happened.

Surveys by BlackRock show affluent US investors held 28 per cent of their portfolios in cash in 2015, the latest year for which data are available. That was up from 25 per cent a year earlier.

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.

And now? It is hard to find evidence that Trump’s election as US president has yet made much difference. Figures from UBS show 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.

While that was down from 24.6 per cent three years earlier, 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 US administration. “If you look in general outside the US, I think that the situation has not really changed a lot.”

Still, it is not unreasonable to assume the factors that persuaded investors to hold cash should reverse in 2017. As Mr Collardi at Julius Baer 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 have 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.

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