Aviva's 2023 Liquidity Outlook
U.K.-based Aviva Investors recently published, "Opportunities in cash: Our 2023 liquidity outlook." They explain, "The outlook for cash investors in 2023 is broadly positive. Markets and professional forecasters expect central bank rate rises across developed markets, which will feed through to increasing yields in liquidity strategies. Our own House View favours a material overweight to cash: 'Cash, offering a decent yield and -- assuming inflation abates -- a store of value as well, is for the first time in many years a viable and essential tool to achieve target returns and manage risks for investors.'" The piece continues, "But there is always uncertainty. First, there is uncertainty as to the timing and peak level of central bank rates. Addressing a potentially highly variable rate environment will require prudent and, above all, active management of duration. Second, there is the potential impact of recessionary conditions on widely held issuers in liquidity portfolios. While these issuers have adequate buffers to protect themselves from a deteriorating economic picture, we will continue to closely monitor evolving credit conditions." Aviva tells us, "Rate hikes are positive for liquidity fund yields. Liquidity funds only hold short-dated securities. In a rising rate environment, as these securities mature, they are reinvested at the new, higher, prevailing rate. As a result, rate rises are passed on to investors quickly -- typically much faster than bank deposits -- and the risk of capital loss is low due to the high credit quality of issuers and diversification of the pools." Discussing "Three cash investment strategies for 2023," they write, "In this context, we see three main opportunities for cash investors: Allocating to liquidity funds <b:>`_: Liquidity funds will re-set quickly to the prevailing interest rate environment. This means funds should be able to quickly pass on rate rises to end investors. For example, sterling liquidity funds were yielding 3.45 per cent gross on average on 13 January 2023, 31 business days after the most recent rate hike of 50 basis points, demonstrating a rapid transmission of policy developments to investors. Allocating to short-term bond funds: As we discussed recently in Enhanced cash in short-duration fixed income, we see significant opportunities for investors in short-duration credit -- i.e. securities just outside the typical investible universe for liquidity funds. Opportunities look particularly strong across asset classes -- notably asset-backed securities -- bringing the potential of both stable returns above cash and diversification. Locking in: Yield curves across currencies are steep at the short end, while falling in the mid- to long-term. This implies investors view near-term prospects (rate rises) as more positive than longer-term prospects (economic issues). Given the expectation of rates plateauing -- or even beginning to decline -- in late 2023, investors may generate attractive returns from locking-in relatively short-dated baskets of securities, providing potential diversification, high credit quality and, most importantly, attractive yields available now."
