When cash is no longer king

With markets correcting and interest rates falling as economic growth slows, investors may need to adapt their investment strategies as economic conditions change.

- Lukasz De Pourbaix, head of strategic sales and solutions, Fidelity International

As global inflation moderates, various central banks, including the Reserve Bank of Australia, have begun to cut official cash rates.

If inflation continues to moderate, interest rates are likely to fall even more in Australia. In this environment, while bonds are not a replacement for cash, they can play an increasingly important role within a diversified portfolio by providing yield, the potential for capital gains and diversification.

Constructing a defensive portfolio typically requires a balance between generating yield, diversifying investments, and managing risk. Traditionally, such a defensive portfolio consists of three core building blocks: cash, duration (government bonds), and credit or corporate bonds. These assets offer a spectrum of risk-return profiles, ranging from cash to higher-yielding but riskier assets like high-yield and emerging market bonds, which tend to exhibit a stronger correlation with equities.