The case for cash: Should you save in a cash Isa

 
Harriet Green
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Cash hardly looks hot at the moment. It has lost almost 30 per cent of its real value in the past 10 years because of inflation, points out BlackRock’s Alex Hoctor-Duncan. “Worryingly, 68 per cent of Isa holders looking to retire in the next decade (55 to 64 yearolds) only save into cash Isas.

Even if a saver has been quite nimble in chasing the best deposit and cash Isa rates, they would still have made a loss in real terms of 6 per cent.” Britons have been using cash as a safety blanket, he adds, but “it won’t keep them warm in later life”.

But others are stressing that there is a very compelling case for holding at least some of your savings in a cash Isa. Aside from the importance of holding cash for liquidity purposes, since inflation is now low, it is no longer necessarily inevitable that money sitting in a cash Isa will lose its real value over the short term. It’s also a straightforward way to shield £15,000 from the taxman (this April, a couple can shelter £60,480 in cash, points out Hargreaves Lansdown’s Danny Cox). But Mike Felton, fund manager of M&G UK Growth, goes further. He says that current levels of volatility in a world of elevated macro uncertainty “enhance the option value of cash”.

First, there’s too much belief in central banks, he says. “Central bankers are no longer all singing from the same hymn sheet, increasing the chances for policy error.” And given the “woeful handling” of the financial crisis, market optimism is misplaced.

Second, Felton points to a World Bank report which recently warned that the global economy is over-reliant on the “single engine” of the US recovery. In January, it revised down its global growth forecast for 2015 from 3.4 per cent to 3 per cent. “The issue now is whether the US economy still fails to reach take-off velocity, following several trillion dollars of QE.” While analysts continue to debate the efficacy of QE, there is agreement that it has acted as a barely disguised currency devaluation tool, he adds. This means we’re seeing an exchange rate race to the bottom, “with no overall winner”.

Third, the valuation of the UK equity market looks good when compared to counterparts and most other asset classes, says Felton – but this is all relative. Weak growth, currency headwinds and climbing wage expectations all “bode badly for US corporate earnings at a time when the valuation elastic of Wall Street already looks stretched”. And even in the UK, it’s tough finding value in an absolute sense, Felton says.

Cash, aside from making up a fundamental portion of any portfolio for liquidity purposes, also gives Isa investors the means to “act quickly when heightened volatility presents the inevitable opportunities,” says Felton. But the current climate warrants a cautious approach to investment.

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