Aidan Shevlin

When massive uncertainty and volatility prevail in the financial markets as the US government transitions to the Trump administration, Asian investors who are seeking a relatively stable, low-risk, but well-performing asset class would do well to consider US dollar money market funds. 

“It’s pretty attractive, and that’s actually what we're seeing,” says Aidan Shevlin, head of international liquidity fund management at J.P. Morgan Asset Management in an interview with The Asset. “If we look at money market funds and the ultra-short duration space at this point in time, maybe one year duration or a maximum of three-year final maturity, we’re seeing a huge amount of money coming into these funds.”

US money market funds have reached record levels this year with the latest data from the US Securities and Exchange Commission ( SEC ) indicating that the total amount of assets in US money market funds has reached approximately US$6.4 trillion as of March 2024, representing a slight decrease from the all-time high February 2024 when assets exceeded US$6.5 trillion.

For Asian investors, US money market funds present very attractive opportunities after years when they were earning 0% on their cash holdings. Also, the slowdown in the Asian market, and prevailing uncertainty and volatility makes investing in regional equities and bonds more challenging for more conservative and risk-averse investors.

“Asia does well in a scenario where China is growing strongly and where the Fed policy is loose; and, unfortunately, we’re not in that situation right now,” Shevlin explains. “China’s growth is weaker, and the Fed is keeping rates higher, and is likely to keep them higher than people initially expected. So, under these circumstances, it will be a tougher environment for Asia to do well in the coming times.”

In addition, threats by incoming US president Donald Trump to impose tariffs on a lot of its principal trading partners, including China, Europe, Canada and Mexico, are further aggravating the already uncertain and volatile markets.

Although the US economy is doing better than expected, it is still just barely avoiding a recession and the impact of Trump’s impending tariffs threatens to push inflation, which has weakened but is still above target, higher in the long term.

On the bright side, the relatively high interest rates provide higher real yields on cash, which is an opportunity for more conservative investors who wish to avoid the uncertainty and volatility of other asset classes.

“For investors who are more cautious,” Shevlin shares, “the fact that we’ve got really high real yields on cash at this moment in time gives you a good place to hide out if you’re getting 4% or 5% yield on your US dollars, Aussie dollars, and so forth.”

US dollar money market funds can be a good investment when the US dollar is strengthening because this asset class can benefit from a more stable environment as it invests in low-risk instruments like US treasury bills, certificates of deposit and commercial paper. These instruments are less volatile and can provide a safe haven during economic uncertainty or fluctuations.

Also, when the US dollar is strong, Asian central banks typically maintain higher interest rates, as the Fed is doing now, which benefits money market funds directly as they invest in these instruments tied to these rates, thus, providing better returns than traditional accounts.

In addition, money market funds are highly liquid, allowing investors to access the funds more easily, hence, making them attractive for short-term savings or parking cash during periods of market volatility and uncertainty.

However, money market funds offer lower returns than equities for more aggressive investors who desire higher returns and don’t mind higher risk, market uncertainty and volatility. The current 12-month total return for the S&P 500, which includes dividends, is approximately 38.02% as of October 2024. This marks a significant increase from the 10.14% return observed a year earlier and is well above the long-term average of 9.18%.

In the longer term, inflation risk is also another concern for investors in money market funds since, even if the nominal yield on money market funds increases, their real return could be eroded by inflation, especially if inflation rises or remains high.

The consistent inflows into these funds are largely driven by high short-term interest rates, offering yields attractive to both retail and institutional investors. Retail investors, according to Shevlin, have contributed significantly to this growth, particularly through prime money market funds, which invest in higher yielding, albeit slightly riskier securities, such as commercial paper.