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Please see below an interesting article received from Beinvest recently. Although Britain has become a nation of savers following lockdown, this article provides an insight into the disadvantages of cash savings and discusses more beneficial alternatives.

Unable to travel, socialise or do many of the other things that usually deplete their bank accounts, Britain has become a nation of savers. However, this welcome financial cushion may not be as protective as hoped if inflation takes hold.

Around £75 billion was held in ISA accounts in 2019 to 2020, an increase of £7.1 billion over 2018/2019. However, most of this rise – £4.8 billion – went into cash ISAs, while Stocks and Shares ISAs can only command a distant second place. (1.)

Cash has its role. If people have a short-term savings goal, such as a house deposit or a new car, cash is almost certainly the right place for their savings. Equally, it is always sensible to have a few months’ worth of expenses in a readily accessible cash account as a buffer against life’s various hiccups – redundancy, sickness, a leaky roof. But too much in cash for too long can be corrosive for long-term wealth, particularly today.

The impact of inflation

Rising prices will erode the real value of a saving pot. While cash may feel inherently safe – £10,000 goes in and, usually, it stays at £10,000 – if it only buys half as much, that is a real problem. This isn’t as unlikely as it sounds: a savings pot of £10,000 would be worth just £6,100 in real terms after 25 years with inflation at 2%, the current Bank of England target. If inflation rises to 3%, that drops to £4,780. At 4%, that savings pot is worth just £3,750. (2.)

This wouldn’t be a problem if savers were getting sufficient interest on their savings accounts to compensate. But the majority of savings accounts now pay less than 1%. The top-paying easy-access savings account pays just 0.5% (3.). In extreme cases, banks charge their customers to save with them. Low interest rates have, unfortunately, changed the landscape. Cash savers are often losing money in real terms and the longer they remain in cash, the more the problem compounds.

Inflation today

Inflation has been relatively benign in recent years, hovering around the Bank of England’s target rate. However, there are reasons to believe that a higher inflation environment may be imminent. There are short-term considerations: as the world emerges from the strictures of lockdown, there is pent-up spending. After a year confined to their home, people are keen to travel, socialise, shop. At the same time, production difficulties have created supply problems for certain commodities and key components such as semiconductors. This is creating shortages and pushing up consumer prices.

There are also longer-term reasons for structurally higher inflation. Governments are spending vast sums to ‘build back better’, pouring trillions into decarbonisation plans and infrastructure building. This is also creating significant demand in key areas and driving prices higher.

Equally, some of the deflationary forces that have curbed inflation over the past two decades are reversing. Deglobalisation, for example, brought cheap goods from China and lowered prices for everyone. But the fragilities exposed by the pandemic have shown the difficulties inherent in long supply chains that cross multiple borders. Global governments are now working to ‘reshore’ critical industries. This may raise the price of goods and services.

In normal circumstances, central bankers would simply put up interest rates in response to any inflationary pressure. However, the recovery is fragile and central banks, led by the Federal Reserve, have made it clear that they will look through short-term inflationary pressures until economic growth is firmly established. It is also increasingly difficult for central banks to raise rates: debt levels are higher, particularly for governments. High rates also risk real disruption to equity and bond markets, which have grown dependent on central bank liquidity. This means inflation will be allowed to ‘run hot’ for longer.

Potential solutions

Cash is not the only problem area. Other ‘safer’ assets can also struggle during periods of high inflation. Inflation is generally bad news for bonds, for example, because their income is fixed and therefore doesn’t keep up with higher prices.

Stock market investments can provide better protection against inflation, providing it doesn’t rise too quickly. 1970s-style inflation tends to be difficult for most asset classes. Companies should be able to put up prices in response to inflationary pressures, which in turn should be passed on to investors in the form of higher dividends or profit growth. Historically, savings held in a diversified portfolio of shares have kept pace with rising prices over the long term.

For savers who have managed to build up some spare cash over lock down, it is worth considering the risks of holding it in cash at a time of potentially rising inflation. The stock market can be a volatile place, but it has some natural advantages in today’s climate. A carefully blended and diversified portfolio can help protect the real value of a savings pot. Remember, investments carry risk and you can get back less than invested.

Cash has a variety of important uses; for short-term known expenditure, for unknown emergency expenditure and for emergency funds just in case you lose your income or need to ‘switch off’ investment or drawdown pension income. We recommend that you have at least one year’s expenditure in cash deposits.

Please check in again with us soon for more relevant content, analysis and news.

Stay safe.

Chloe

02/08/2021

Please see below article received from AJ Bell yesterday, which highlights the effect that central bank policy and the Delta variant have on the volatility of global markets and economic recovery.

“Many investors are familiar with the saying that ‘markets like to climb a wall of worry,’ but few are less well versed with the opposite which is they ‘slide down the slope of hope.’ That is what may be happening right now as markets fret about the Delta variant and whether it could stop the global economic recovery from developing as quickly as the near-40% rally in the FTSE 100 from its lows would demand,” says AJ Bell Investment Director, Russ Mould.

“But another factor could be at work (besides the traditional light volumes and case of blues which can dog markets in summer), and that is central bank policy, because some leading monetary authorities seem to be draining liquidity rather than supplying the tidal wave of cheap money which, many argue, is a prime reason why asset prices are rising despite the difficult backdrop.

“The Bank of Canada has cut back the scope of its Quantitative Easing programme for the third time, the Reserve Bank of Australia has also eased the rate of asset purchases and New Zealand has stopped buying assets altogether. None of them are going as far as shrinking their balance sheet, but they are growing them more slowly or, in New Zealand’s case, finally holding it in check.

“Even the US Federal Reserve is getting in on the act. The American central bank is using reverse repos in vast quantities, even as it continues to run QE at $120 billion a month, with the result that it is siphoning liquidity away from the financial system with one hand even as it pumps it in with another.

Source: FRED – St. Louis Federal Reserve

“Without wishing to get too technical:

• A repo (or repurchase agreement) sees a financial institution sell Government bonds (in this case US Treasuries) to another one, either a bank or central bank, on an overnight basis. It then buys them back the next day, usually as a slightly higher price. The idea is the seller can raise immediate liquidity if they happen to need it. (It also enables the counterparty to make a financial return pretty much without risk, given the extremely short time horizon involved and the collateral that backs the trades).

• The repo rate spiked suddenly in the USA in autumn 2019 in what was seen as a sign that the Fed’s then Quantitative Tightening plan (of raising rates and withdrawing QE) was working well – so well that banks were scrambling for cash as the financial system began to creak. Under Jay Powell, the US central bank backtracked on QT and – as the pandemic hit – cranked up QE to ever-more dizzying levels in 2020. That tidal wave if liquidity mean the US overnight repo rate is 0.07% – down from that panicky 6.9% one-day spike two Septembers ago.

Source: Refinitiv data

• A reverse repo (or reverse repurchase agreement) a bank or central bank sells Government bonds in exchange for cash to a range of counterparties, over a pre-determined timeframe (often overnight). This therefore drains cash out of the financial system, at least if a central bank is doing it and the Federal Reserve is hard at work here right now. At the last count, the Fed’s outstanding reverse repo liabilities were $860 billion, the equivalent to more than seven months’ worth of QE.

Source: FRED – St. Louis Federal Reserve

“In many ways it is hard to talk market talk of the Fed turning hawkish seriously – the dot plot of two quarter-point rate rises from a record-low by the end of 2023 is more like a budgie clearing its throat for a quick chirp rather than a vicious swoop from a bird of prey.

“But perhaps the US Federal Reserve is laying the groundwork for tightening monetary policy after all and taking these initial steps to test how financial markets (and the economy) will react.

“For the moment, there is no sign of financial stress anywhere in the system, at least according to the tried-and-tested St. Louis Fed Financial Stress and Chicago Fed National Financial Conditions indices. Both are trading very close to their all-time lows.

Source: FRED – St. Louis Federal Reserve

“The S&P 500 still trades close to all-time highs, so again the Fed will be hoping the turn in the liquidity tide does not rock too many boats here. A spike in the VIX and the stumble in the S&P will leave Fed officials on alert, though, as autumn 2019’s repo rate spike saw WeWork’s much-hyped flotation fall apart, Bitcoin sink 25% in a month and wider equity and bond markets both get the jitters, albeit very briefly.”

Source: Refinitiv data

Please check in again with us soon for further news and market analysis.

Stay safe.

Chloe

26/07/2021

Please see below ‘Markets in a Minute’ article received from Brewin Dolphin yesterday evening, which provides market analysis on a global scale. The commentary discusses rising inflation in the UK and US as well as Asia’s considerable economic recovery. 

Most major stock markets fell last week amid a higher-than-expected surge in inflation and increasing cases of Covid-19.

In the US, the S&P 500 and the Nasdaq slipped 1.0% and 1.9%, respectively, after data showed inflation jumped by 0.9% in June – almost double the figure forecast by economists. Federal Reserve chairman Jerome Powell reiterated his view that inflation pressures are temporary, which helped to moderate losses.

The pan-European STOXX 600 fell 0.6% after figures showed new Covid-19 cases in the EU and EEA had surged by 64.3% from the previous week, raising concerns about the continent’s economic recovery. The European Centre for Disease Prevention and Control said 20 countries had seen an increase in new cases, although hospitalisations remain stable.

The UK’s FTSE 100 also slid 1.6% as inflation fears resurfaced and rising infections outweighed optimism about ‘freedom day’.

Over in Asia, China’s Shanghai Composite ended the week up 0.4% after figures showed gross domestic product (GDP) rose by 7.9% in the second quarter from a year ago, while retail sales and industrial production in June surged by 12.1% and 8.3%, respectively, from a year ago.

Stocks slump as Delta variant spreads Equities slumped on Monday (19 July) as the spread of the Delta variant of Covid-19 weighed on investor sentiment. The Dow recorded its worst day in three months, sliding 2.1%, while the S&P 500 and the Nasdaq lost 1.6% and 1.1%, respectively.

The FTSE 100 posted its biggest one-day fall since May and finished below the 7,000 mark. Travel and leisure stocks suffered on news that fully vaccinated arrivals from France will still need to quarantine. British Airways owner IAG slumped 5.2% and easyJet declined 6.7%. Energy stocks also struggled after OPEC+ agreed to increase supply from August, leading to a decline in crude oil prices.

UK and European stocks rebounded at the market open on Tuesday, with the FTSE 100 and the STOXX 600 both adding 1.1%. Japan’s Nikkei 225 tumbled to a six-month low following Monday’s selloff.

US and UK inflation soars

Figures released last week showed inflation in the US and the UK accelerated in June, leading to renewed speculation that central banks could start to rein in their support for the economy.

In the US, headline consumer prices rose by 0.9% from the previous month and by 5.4% from a year earlier, marking the fastest pace of annual growth since 2008. Core inflation (excluding food and energy) rose by 4.5% from a year ago, the highest since 1991.

The surge was largely driven by the biggest monthly bounce in used vehicle prices for more than 60 years. Prices rose by 10.5% between May and June, meaning second-hand cars were being bought for around 45% more than a year earlier. Prices of new cars also rose by 2% month-on-month – the biggest increase since 1981.

Meanwhile, UK data showed the headline consumer prices index rose to 2.5% in the 12 months to June, the fastest pace for nearly three years, as prices continued to recover from their early pandemic lows. Higher food and fuel prices drove the increase, as did rises in the cost of eating and drinking out, clothing and footwear, and second-hand cars.

US retail sales beat expectations

Last week also brought the latest data on US retail sales, which unexpectedly rose in June by 0.6% from the previous month, according to the US Census Bureau. Economists polled by Reuters had forecast a drop in sales of 0.4%. On an annual basis, sales surged by 18.0% and are now above their pre-pandemic level.

The rebound came despite purchases of motor vehicles declining for the second month in a row amid a lack of supply caused by the global semiconductor shortage. US retail sales are measured by receipts not volume, which meant higher prices from supply constraints flattered the figures.

Although consumers seem to be spending more, separate data released last week suggested they are also growing more cautious. The University of Michigan’s preliminary gauge of consumer sentiment fell to its lowest level since February, largely because of worries about inflation.

“Consumers’ complaints about rising prices on homes, vehicles, and household durables have reached an all-time record,” said Richard Curtin, the survey’s director.

Japan manufacturing index soars

Over in Japan, confidence among Japanese manufacturers rose in July to its highest level for twoand-a-half years, as global demand helped the country’s export-driven economic recovery. According to the Reuters Tankan poll, sentiment was boosted by strong confidence at car, chemical and metal products manufacturers, which offset poor conditions among textiles and paper.

However, the survey also showed service sector sentiment turned pessimistic in July, falling to -3 from a flat reading in June, as Covid-19 mitigation measures continued to curb spending. Tokyo is currently under its fourth coronavirus state of emergency, which is due to last until 22 August. On Wednesday (14 July), the capital recorded its highest number of new infections in almost six months.

We will continue to publish relevant articles and news, so please check in again with us soon.

Stay safe.

Chloe

21/07/2021