Global Market Strategist
Global Market Analyst
Whether the global economy continues to expand, falls into a downturn, or even experiences stagflation, we believe asset classes other than cash will prove better investments.
Introduction
Amid elevated policy uncertainty and market volatility, some investors might conclude that hiding in cash is a sensible strategy for the next 12 to 18 months. After all, deposit rates remain relatively high across Western markets, and the macroeconomic picture is murky. Take the UK: 49% of the £819bn in savings British households have accumulated since the Covid pandemic remain stashed in deposits, rather than being put to work elsewhere.
However, in our view cash will not prove the best option for investors. Whether the global economy continues to expand or falls into a downturn or recession, we expect cash to underperform other asset classes. Even in a stagflationary scenario, investors can look elsewhere for meaningful portfolio diversification.
Expansion continues
Our base case for the next 12 to 18 months anticipates a growing global economy, despite political noise and subsequent market volatility. In this scenario, Western central banks gradually reduce policy rates, but overall these remain higher than the levels of the 2010s. Holding cash might therefore seem attractive.
However, we think equity markets should prove a better investment choice in this state of the world. Resilient economic activity would bolster equity earnings, helping currently expensive US stocks grow into their high valuations and supporting returns and multiples elsewhere. Equity upside would probably be strongest in cyclical sectors and small cap stocks that are currently trading at lower valuations.
Even if investors believe that equity price returns will be muted over the next 12 to 18 months regardless of the growth backdrop – perhaps because there is less scope for multiples to expand from today’s levels, particularly in the US – total returns should still exceed deposit rates. This is thanks to the dividend and buyback income on offer in today’s equity markets, especially in Europe.
Exhibit 1: Global equities offer attractive income
Buyback and dividend yields
% yield
Source: Bloomberg, FTSE, LSEG Datastream, MSCI, S&P Global, Tokyo Stock Exchange, J.P. Morgan Asset Management. US: S&P 500; Europe ex-UK: MSCI Europe ex-UK; UK: FTSE 100; Japan: TOPIX; EM: MSCI EM. Chart shows yields for the last quarter in which buyback data is fully available. Net buyback yield adjusts for share issuance. Past performance is not a reliable indicator of current and future results. Data as of 21 February 2025.
Drawdown or downturn
If bad economic news led to a stock market drawdown, cash would likely outperform equities as stock valuations contracted and analysts pared back their earnings forecasts.
However, we believe core bonds should prove a better choice than cash in this scenario. Today’s elevated deposit rates would evaporate as Western central banks cut policy rates in response to lower growth and weakening inflationary pressures. Thus, cash returns would contract meaningfully. In contrast, the return on core bonds would rise as policy rates fall.
Indeed, at today’s yield levels there is significant scope for fixed income to play its traditional diversifying role in the event of a downturn or recession. If the yield on the US 10-year fell 200 basis points over one year in response to interest rate cuts by the Federal Reserve, investors could expect a total return of around 20%. In contrast, holding cash would expose investors to significant reinvestment risk.
Exhibit 2: Core bonds offer diversification from recession risk
Government bond return scenarios
%, total return over 12 months
Source: LSEG Datastream, J.P. Morgan Asset Management. Chart indicates the calculated total return achieved by purchasing the given government bond at its current yield and selling in 12 months’ time given various changes in yield. For illustrative purposes only. Past performance is not a reliable indicator of current and future results. Data as of 21 February 2025.
Stagflation
If 2025 starts to resemble 2022, then cash investments might seem appealing. Weak growth would likely weigh on equity markets, but sticky inflation could prevent central banks cutting policy rates, holding back core bonds.
However, investors still have options that could outperform cash. The best solutions would be found in private markets, including real assets such as infrastructure and timber, which were top performers in 2022.
Liquid solutions such as commodity stocks or hedge fund strategies could also prove a better choice in a stagflationary scenario. For example, global macro hedge funds returned nearly 10% over the course of 2022, significantly outperforming cash.
Exhibit 3: Alternatives offer the best inflation-protecting solutions
Selected public and private market returns in 2022
%, total return in USD
Source: Bloomberg, Cliffwater, FTSE, HRFI, LSEG Datastream, MSCI, NCREIF, S&P Global, J.P. Morgan Asset Management. Global government bonds: Bloomberg Global Aggregate – Treasury Index; Commodities: Bloomberg Commodities Index; Global macro hedge funds: HRFI global macro; European core real estate: MSCI Global Property Fund Index – Continental Europe; Direct lending: Cliffwater Direct Lending Index; Infrastructure: MSCI Global Quarterly Infrastructure Asset Index (equal-weighted blend); Timber: NCREIF Timberland Total Return Index. Transport returns are derived from a J.P. Morgan Asset Management index. Past performance is not a reliable indicator of current and future results. Data as of 21 February 2025.
Conclusion
While investors may be aware that cash is never a good long-run option, it can be tempting to hide from elevated uncertainty and market volatility in the short-run. Still-elevated deposit rates only amplify cash’s temptations today.
But in our view, cash is unlikely to outperform a multi-asset portfolio even over the shorter-run. Whether the global economy continues to expand, falls into a downturn, or even experiences stagflation, we believe asset classes other than cash will prove better investments. Investors should therefore look to diversify their portfolios broadly, across global equities, fixed income, and inflation-protecting assets – whether these be in private or public markets.
Indeed, history suggests that even during abnormal uncertainty, cash has rarely been the best option for multi-asset investors. After a selection of economic and geopolitical shocks dating back to 1990, a 60/40 portfolio of equities and government bonds has outperformed cash 75% of the time over a one-year horizon, and always over three years. The average excess returns above cash are meaningful: 9 percentage points over one year, and more than 20 percentage points over a three-year timeframe.
Thus, whatever their outlook for 2025, investors should bear in mind the historical value a diversified multi-asset portfolio has provided and avoid the temptation of cash.
Exhibit 4: Hiding in cash has historically proved the wrong approach
Subsequent 1-year and 3-year returns over cash after shocks
% points, excess total return
Source: Bloomberg, S&P Global, J.P. Morgan Asset Management. 60/40 portfolio is constructed using S&P 500 Index and S&P 10-year US Treasury Note Futures Index. Cash: ICE USD LIBOR (3M). Return calculation begins at the end of the month prior to the shock. Data as of 21 February 2025.