Cash investments are usually seen as being the boring, low-risk alternative to high risk/high return ventures, but research now indicates that across the broad range of investment options within superfund’s, cash deposits now equate to 18 per cent of Australian super assets. This compares to an average of 10 per cent that has been maintained for the past 20 years.
One of the reasons for this rise in cash deposits is due to costly stock prices; this in turn drives a rising number of superannuation funds to stockpile on cash despite the fact that cash investments usually receive a low return.
While 18 per cent is certainly a leap from the past two decades that saw cash deposits sitting around 10 per cent, it is still below the 2012 peak of about 20 per cent cash holdings across self-managed super funds and funds regulated by the Australian Prudential Regulation Authority (APRA). However, the spark surrounding these findings has been set off by the fact that rates are sitting at a record low of 2.25 per cent. In fact the average one-year term deposit returns around 2.99 per cent today compared with 4.8 per cent in 2012.
Could there be a Bubble?
The other issue of concern with regards to higher-than-usual cash deposit values is due to the fact that there is seemingly plenty of money “lying around” that could be used for equities and to boost valuations. The fact is that more than $80 billion per year is being flown through the superannuation system and if 18 per cent of this just sitting as cash deposits then this could pose a problem to other types of assets.
Furthermore, whilst cash sits in term deposits these deposits are maturing but are not being rolled over because of low interest rates. In fact, many industry insiders have admitted to holding slightly more cash than usual, with figures upwards of 26 per cent across funds. The view is that there is presently a slightly higher risk in the current sharemarket.
Whilst cash rates have been steadily declining, the search for higher-yielding assests, such as shares in the major banks and Telstra Corp has become evident. A significant hunt for better yields in stocks and property has also emerged which has lead to some fund managers raising concerns about bubble-like conditions forming in the Australian sharemarket. This in turn has lead to fund managers locking in profits previously obtained.
However, whilst the hunt may be on for better yielding shares, the Australian sharemarket still appears as being quite expensive at just above 16 times earnings, compared with the long-term average price-earnings (P/E) ratio of about 14 times earnings. Therefore, whilst fund managers may be seen as hoarding cash deposits, it is more likely that these managers and SMSF investors are just wistfully anticipating for the right opening to discharge of their cash holdings.
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