"With cash rates priced to decline substantially, we think it is time to deploy liquidity, locking in bond yields and seeking out value in the equity market."

Many investors remain overweight cash, but markets have begun to price for a substantial decline in short-term interest rates. The Asset Allocation Committee (“the AAC”) therefore thinks it is time to deploy liquidity, locking in bond yields before they, too, are dragged down, and seeking out value in equities and other markets. As a result, we have heavily downgraded our view on cash. However, while a redeployment of cash and declining rates could sustain current market momentum, rates are priced for a decline because economic growth is expected to slow, and that fragile fundamental backdrop makes us cautious where valuations are full. Instead, we favor the laggards of the past 12 months, which we think could benefit not only from liquidity coming in from the sidelines, but also from our central scenario of gradually declining inflation and slowing but not recessionary U.S. growth. That includes large swaths of the fixed income universe, especially short to intermediate maturities where yields still reflect today’s high policy rates. It also includes those pockets of the equity market that have priced for a harder landing or appear structurally undervalued, such as small caps, industrial, real estate and healthcare sectors, value stocks and Japan. Commodities, especially industrial metals, have also priced for a harder landing, and could be a useful hedge against unexpected upside in inflation or growth—particularly should that originate in China. When cash begins to drag on returns but economic fundamentals remain uncertain, conservative valuations become an investor’s friend.