Since the end of August savings rates have tumbled unceremoniously, making life harder for savers looking for a good deal. So, what is going on? There are several plausible explanations for the raft of rate cuts from saving providers. And much of it joins together to paint a wider negative picture.
Savings providers could be correcting their rates from wrongly-anticipated Bank of England rate rises. The global economy until quite recently looked set to keep growing and policymakers to tighten monetary policy. But in the past few months, economic indicators in the UK, Germany and other developed countries have started flashing for a recession. Savings providers could have wrongly anticipated a rate rise, and now reversed course to anticipate rate cuts. This is more pronounced thanks to fears over a no-deal Brexit that could lead to a bigger rate cut from the Bank of England too. Another related reason, and perhaps more concrete, is that investors are pulling their cash out of the stock market thanks to recession jitters. Choppy economic data, threats of a trade war between the US and China, and other events on the horizon such as Brexit, are causing ordinary investors to flee equities and pile into old-fashioned cash savings. This in turn is overwhelming demand for savings providers’ products and forcing them to disincentivise more new deposits. Whether or not the rates continue to plummet remains to be seen.
Investors shun UK equities
A plummeting pound, volatile bond and stock markets, a superpower trade war, a looming global recession, and political turmoil over Brexit – it’s only human to be rattled in the face of all that. When markets turn rough, conventional advice to savers with cash invested for the long term is always to ensure you are well diversified, and avoid knee-jerk reactions. But even if investing is a long game, and it’s unwise to cash out because markets have temporarily gone wild, there are some steps you might consider taking. Reviewing where you are invested and whether to do some rebalancing isn’t an over-reaction. Should you reduce your UK equity exposure and look to the US or Japan, or switch to lower-risk assets like bonds, or simply cash? And what about gold, which generally does well in times of global slowdown and uncertainty? Here’s a quick summary:
- Yields on bonds are very low and are sensitive to changes in economic outlook – so if the global outlook picks up bond prices may fall. Holding UK government bonds might not protect investors if a no-deal Brexit leads to a loss of confidence in the British economy and leadership.
- Cutting exposure to UK assets is one option. Emerging markets may have better long-term growth potential and their governments often have less debt than their Western equivalents.
- Stick with the UK: Pound is weak so buying abroad is expensive. Those investing in US and global equity funds could be making a ‘grave mistake’ by taking their depressed pounds and ploughing them into much more expensive US shares.
- While gold is perceived as a safe haven in times of uncertainty, this ‘doesn’t mean you can’t lose money.
Restrictions on high risk investments?
Should investors who buy high-risk bonds be compensated when things go wrong? The obvious answer is no, with the clue in the word “risk”. But what if a bond is marketed to small investors with a “quarterly interest rate”, and is approved for inclusion in an Isa, and is promoted by a financial advice firm authorised and regulated by the Financial Conduct Authority. Would you expect the bond to lose not just the interest, but all the money you deposited? This is the type of scenario in which many investors in so-called “mini-bonds” have found themselves. About 11,000 investors in London Capital & Finance’s mini-bonds could lose a total of up to £236m, in one of the worst financial scandals for a decade. Mini-bonds are just an IOU to a company, are rarely secured on anything, and are usually completely illiquid and cannot be traded. They are simply too risky for the average small investor. Even if the interest rate on the bond is 8%, it’s hardly enough to compensate for the evidently high risk of losing your shirt. Now Charles Randall, chairman of the Financial Conduct Authority (FCA), has conceded that it was “clear that there’s too much confusion” about what investments were covered by the regulator and which were not.
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