Investors sat in cash are missing out on potentially better opportunities to generate attractive long-term income.

The higher interest rates delivered by the Bank of England (BoE) and the European Central Bank (ECB), coupled with the apparent safety provided by cash, is luring European investors towards cash-like instruments, such as money markets funds and cash deposits.1

However, investors are missing out on potentially better opportunities to generate attractive long-term income. Although other instruments beyond cash come with capital risk, in our view combining stocks and bonds can balance these risks and provide an income that can be sustained at a higher level over time, along with the potential for capital gains.

Comparing coupons

The roughly 3% income on cash deposits in the eurozone and 4% available in the UK is optically appealing when one considers the interest rates that have been available for much of the last decade. However, these cash rates are unlikely to stay this high. By the start of 2026, the market expects policy rates in both the eurozone and the UK to have fallen by around 100 basis points.  

Income-focused investors should consider looking for more durable sources of cash flow. With yield curves currently inverted, on coupons alone, there appears little incentive to extend into longer-duration government bonds. In corporate credit and equities, however, income is meaningfully higher. Moreover, our expectation is that this income can be sustained. Certainly, in investment grade credit the risk of default, and therefore not receiving your coupon, looks low (see Higher for longer is good for fixed income).

In equity markets, our expectation is that dividends are more likely to grow than be cut in the coming months as payout ratios are still below their pre-Covid levels. Dividends have historically been a stable part of equity returns.

Finally, while public markets offer plenty of income opportunities, investors without immediate liquidity needs can consider alternative asset classes, such as transportation or real estate. These assets generally operate under long-term contracts, which provide predictable income streams over extended periods. The income generated by alternative asset classes is also often explicitly linked to inflation, thus protecting real income, unlike cash returns, which can be eroded by unexpected inflation.  

What about the capital at risk?

Of course, even if the income from this range of asset classes looks compelling, capital is at risk. One source of capital risk that often holds investors back today is geopolitical risk and the residual chance of recession. However, if such a risk were to materialise, cash rates would be cut quickly as central banks responded to support growth, sending longer-term bond prices substantially higher. Investors worried about this risk would therefore likely be better prepared by holding a basket of high-quality core bonds than cash.

Alternatively, investors may be concerned about high valuations in risk markets. However, our central expectation is that corporate earnings are on a modest upturn (see Shifting gears in equity leadership) which will broaden across geographies. We don’t therefore anticipate a significant leg down in stock markets. An income focus would historically have led to a bias towards Europe, value stocks and defensive sectors, but today dividend opportunities can be found globally and across sectors, so investors can diversify against country-specific risk.

Pairing stocks and bonds therefore provides the opportunity to build a portfolio that offers an attractive income and better protects investors from the range of upside and downside risks that we face today.

Source: BoE, ECB and the European Fund and Asset Management Association.

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