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Video: CIO's Devinda Paranathanthri on putting cash to work (2 min)
Video: The China equities rally with CIO's Suresh Tantia (6 min)
Video: Fed rate cuts, jobs, and inflation with Chief Economist Paul Donovan (11 min)

US wholesale prices fell in August for the first time since April, providing some reassurance on the inflation outlook after the upward surprise last month. This came ahead of the closely watched consumer price inflation data due today, further solidifying market expectations for the Federal Reserve to cut interest rates next week.

The 0.1% month-over-month dip in the pproducer price index (PPI) for August was mainly driven by a 0.2% decrease in service prices, according to data published on Wednesday. On a year-over-year basis, the PPI in August (2.6%) also eased from July’s 3.1% increase.

We expect the consumer price index (CPI) due today to also keep the door open for a resumption of policy easing. Consensus estimates are for a monthly rise of 0.3% in core CPI—higher than what is consistent with the Fed’s annual 2% target, but likely not sufficient to shift the central bank’s focus away from the weakening labor market.

With the Fed set to resume rate cuts imminently and rates in much of Europe already low, we believe it remains a good time to put cash to work.

Cash is not king. Cash’s underperformance against equities, credit, and gold has widened this year, and we believe portfolios holding a surplus of cash will likely increasingly underperform those that put cash to work in higher-yielding segments, especially over a longer-term horizon. Historically, stocks have beaten cash in 86% and 100% of all 10- and 20-year holding periods, respectively, while the probability of bonds outperforming cash also rises with longer holding periods. Taking on manageable levels of risk with excess cash may improve return potential and help combat the corrosive effects of inflation, in our view.

Quality bonds offer a credible alternative source of portfolio income. Treasury yields have moved lower in recent weeks as markets have grown more convinced that Fed cuts are on the way. But the 10-year yield remains at the higher end of its range since 2008. With initial yield typically a good proxy for longer-term expected returns, we expect mid-single digit returns for medium-duration quality bonds in US dollar terms over the next 12 months. Quality bonds offer robust income and help dampen portfolio volatility, in our view, and they look particularly appealing in a downside scenario. If US economic growth disappoints and data weakens, we would expect quality bonds to rally, potentially delivering significant capital gains.

Income-generating assets in Asia and Europe are also attractive options. In addition to select credit opportunities in Asia and Europe, we see value in bonds issued in local currencies amid broad US dollar weakness and solid fundamentals. Separately, we think Swiss dividend-paying stocks are attractive, while Asian equity markets like Singapore, Indonesia, and the Philippines offer dividend yields that are well above global and regional averages. Select equity sectors in Hong Kong, mainland China, Australia, and Japan should also deliver better income than prevailing local cash rates over the next 12 months.

So, with cash returns set to fall further as the Fed resumes rate cuts, we see a growing need to deploy excess cash into higher-yielding assets. Phasing into diversified portfolios over time could also help manage the risk of poor timing, reduce the influence of emotion, and provide more opportunities to benefit from market dips and rebounds.