Ultra-Low Interest Rates Mean Your Cash Could Use a Workout

Wednesday, Nov 26 2014 by

While ultra-low interest rates are a boon for mortgage borrowers, they are a curse for the legions of savers who have seen their cash returns collapse. Six years into supposed economic recovery after the seismic shock of the global financial crisis, the FTSE 100 index has gained 80% from the 2009 low to the present date.

You might have thought that retail investors would have been enjoying this impressive stock market performance. But in fact, not nearly as much as you might have thought, because according to the OECD, UK households have continued to hold very high levels of cash – some 29% of all their financial assets (excluding housing), in common with retail investors across Europe and Japan (Figure 1).

1: UK Households Still Have 29% of All Financial Assets in Cash


Source: OECD, National Accounts at a Glance, 2014

Clearly, the scars of the last two bear markets in 2000 and 2008 still run deep. But instant-access cash savings rates have never been as low as they are today in post-war Britain: in fact, they have been on a steady decline really since the height of the last property boom in 1990, falling from a heady 13.6% to 1.25% on average today (Figure 2).

2: Cash Savings Rates Have Not Been This Low in Post-War Britain


Source: swanlowpark.co.uk

It is obvious that a 1.25% interest rate is not enough to preserve the value of your savings in real terms even when shielded from tax in a cash NISA, when average UK inflation has run at 1.8% on the CPI measure this year, and an even worse 2.5% on the old RPI measure.

If you insist in keeping some of your savings in cash, then I can recommend hunting out Regular Saver bank accounts at HSBC, First Direct, Lloyds Bank and Nationwide which all pay up to 6% p.a. on regular savings of up to £250 per month. Attractive interest rates to be sure, but only available on relatively limited amounts.

Attractive Income from the Stock Market

A second route to higher income is through the stock market, where dividend payments have in general been growing consistently since 2009. UK households are relatively under-invested in shares at 10% of total financial assets, compared to other developed countries (Figure 3).

3: UK Investors'…

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My opinions only, not investment recommendations: Please Do Your Own Research

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The Berkeley Group Holdings plc is a holding company. The Company, along with its subsidiaries, is engaged in residential-led, mixed-use property development. Its segments include Residential-led mixed-use development and Other activities. Its brands include Berkeley, which creates medium to large-scale developments in towns, cities and the countryside, encompassing executive homes, mixed use schemes, riverside apartments, refurbished historic buildings and urban loft spaces; St George, which is involved in mixed use sustainable regeneration in London; St James, which handles projects that embrace private residential development, commercial property, recreational and community facilities; St Edward, which offers residentially led developments, and St William. Berkeley First is a division of the Company specializing in student accommodation and mixed use residential development within London and the South East. Berkeley Commercial is its commercial property developer and investor. more »

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3 Comments on this Article show/hide all

bargainvalue 30th Nov '15 1 of 3

Yes, low interest rates should motivate people to invest. because of higher returns on stock market. If the decline in these rates is working, we can see the changes in money aggregates (negative change in M1). People invest, more money appear on the market and we can see growing indexes. How this theory work in practice in UK, you can check in here

Blog: Bargain Value
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Blissgull 30th Nov '15 2 of 3

So cash is trash. It's a little worrying for investors when articles like this appear.

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Mark Carter 30th Nov '15 3 of 3

Although there's every sign that house prices are increasing, I think great care needs to me made about Quality scores for cyclics. They may look like good quality now because they're coining it in now, but that could also evaporate in a couple of years time.

It's difficult to judge divvies based on BKG, but if you look at housebuilder BWY for example, it's on record earnings and paying our record divs per share. TW isn't, though. Neither is BDEV, but analyst estimates of future dividends is. BDEV is also making record revenues.

Analyst estimates for RDSA have dividends above EPS. So the oilers dividends may be vulnerable.

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About Edmund Shing

Edmund Shing

Edmund Shing is currently Global Head of Equity & Derivative Strategy at BNP Paribas, and formerly a Global Equity portfolio manager at BCS Asset Management. Edmund focuses on a combination of high-level investment themes and fundamental stock-picking, with a dash of technical analysis in the mix. He has a book published in 2015 by Harriman House, “The Idle Investor”, which provides investors with three simple, easy-to-implement strategies using low-cost ETFs to give a good combination of portfolio performance at a measured level of investment risk. Edmund has previously worked at Barclays Capital (as Head of European Equity Strategy), BNP Paribas (as a Prop Trader), Julius Baer, Schroders and Goldman Sachs over a 21-year career in financial markets based in Paris and London. He also holds a PhD in Artificial Intelligence from the University of Birmingham. You can follow him on Twitter: https://twitter.com/TheIdleInvestor more »


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