It's an anniversary many UK savers will wish they never had to mark. Six years ago this month, the Bank of England cut interest rates to a record low of 0.5 per cent, as Britain grappled with the financial crisis. The economy may have rebounded but, as Maike Currie of Fidelity Personal Investing says, “it has been six years of income famine for UK savers”.
In recent months, ultra-low inflation has meant some respite for savers – many of whom are now seeing a real return on their deposits – but the flip side is still little in the way of interest on their cash savings, adds Adrian Lowcock, head of investing at Axa Wealth. It’s “a kind of get poor slowly scheme,” quips Tilney Bestinvest’s Jason Hollands.
Back in 2009, “few expected that rates would stay low for long – and certainly not for six years,” he says. The UK economy is strengthening and unemployment is falling, but there’s currently little pressure on the Bank of England to raise rates – while some experts are still calling a hike this year, most don’t expect one until 2016. And even then, rates are only expected to rise gradually.
So how can savers and investors make the most of a persistently low-rate environment?
CUT THE CASH
While it’s always important to hold some cash, says Danny Cox of Hargreaves Lansdown, in this climate, it’s vital that you’re shopping around for the best rates – and fully utilising your Isa allowance to reduce the amount of tax you’re paying on interest.
Research from online discretionary fund manager Nutmeg found that, out of those savers who never review the performance of their Isas, 40 per cent said it was because they thought it’d be too much hassle to then have to move their money. “This is a great time of year to hunt for the best deal. We’re generally in the good habit of switching our gas or electricity tariffs if we’re paying too much, but we tend to be less keen to do so with our personal finances,” says Nutmeg chief executive Nick Hungerford.
But there’s no getting around the fact that cash cannot offer a lot to savers at the moment. According to calculations by Axa, over the last six years, prices have risen by 17.94 per cent. This, explains Lowcock, means that the value of cash has been eroded, before any interest is earned, by an average of 2.79 per cent a year. Although inflation has subsequently declined, over the full period, it has eaten away at the value of cash after interest by 13.2 per cent, he says.
As the search for income generation becomes ever more challenging, says Currie, individuals would do well to cast their net wider. Choosing to invest in the stock market “will be a bumpy ride,” Cox adds – but you will get a better rate of return over time.
While investors have traditionally looked at equities for long-term capital growth and to bonds for income, we’ve recently seen a sea change. “We now live in a world where equities provide income that is not only higher than that of government bonds, but also higher than many corporate bonds,” explains Currie.
“The stock market as a whole is paying a yield or income of around 3.5 per cent,” says Cox. And with the possibility of capital growth as well, equities offer a good option for those looking to generate both income and growth on their investments.
Calculations by Fidelity Personal Investing show that a saver who had invested £15,000 in the FTSE All Share index on 31 January 2005 would have been left with £31,542.83 on 30 January 2015. If that same amount had been put in a UK savings account, it would only have risen to £16,346.70.
But Hollands points out that the level of an index like the FTSE 100 is not a straightforward measure of value in itself. While it “has just surpassed a level last seen at the peak of the dot-com boom in 1999, when adjusted for 15 years of inflation, the index today would need to be around 9,400 points to be truly comparable”. A better measure, he says, could be price to earnings ratios – which at a 16 times multiple today for FTSE 100 stocks is still a long way off the 27 times multiple seen in 1999.
LOOKING FURTHER AFIELD
What recent years have taught us, says Hollands, is that central banks have been key drivers of markets. If you are investing new money, he says, there’s now a strong case for investments to be directed towards markets where aggressive stimulus programmes are in full flow: ie the Eurozone and Japan.
Funds such as Threadneedle European Select Opportunities and JO Hambro Japan are attractive, he says – although there’s a good case for buying funds that hedge your exposure to the euro and the yen, as these currencies are fluctuating against the pound. Funds like Artemis European Opportunities Hedged convert local currency exposure back into sterling.
PROCEED WITH CAUTION
For the more cautious investor, who may be concerned about equity valuations, even the traditional haven of the bond market offers little comfort at present. While they should always form a part of a well-diversified portfolio, they are not without risk. “It could be prudent to look for a bond fund with greater flexibility and slighter higher income,” says Currie.
She recommends the Henderson UK Preference & Bond Fund, which offers an attractive dividend yield of 5 per cent and sits within the strategic bond sector – which means that the managers have a flexible mandate to invest where they see the best opportunities.
But the path ahead is a rocky one for the asset class. “Once rates start to rise in earnest, bond prices will need to adjust by falling,” says Hollands. It may, therefore, be worth considering absolute return funds, which use a wide toolkit of techniques with the aim of delivering positive returns across different market conditions – with low capital volatility, he adds.
And a rise in interest rates won’t automatically make cash a good option, either. Currie explains that it “may seem like the logical place to invest when rates rise, but they would have to rise by a significant margin to make cash an attractive investment that keeps pace with inflation.”