The world has changed immensely over the past three years: the coronavirus outbreak and associated lockdowns resulted in an unprecedented monetary and fiscal response and a temporary supply/demand mismatch which caused inflation to start rising. Just as we were starting to return to some sort of normality, Russia invaded Ukraine – and the resulting energy and food price shock that followed turbo-charged inflation forcing central banks around the globe to significantly increase interest rates.
In this environment, we are aware that some clients have had it suggested to them by a bank or building society that a “cash ISA” is a much safer option to a stocks and shares ISA, especially now that on the one hand interest rates have been rising whilst on the other equity markets have been volatile.
Whist there is no denying that investing in equity markets is risky, it is obviously more so if one has only a short-term time horizon for investing – as history is littered with periods where equity markets have fallen sharply for a couple of weeks. For example, the FTSE-100 fell over 32% during the stock market crash in October 1987, while more recently, the coronavirus outbreak resulted in the FTSE-100 again losing just over 32% over a period of just 4 weeks. While both of these periods were very scary at the time, in both cases, these losses were fully recouped in less than two years. And given the growth in equity markets, the 1987 crash now looks like a small blip on a long-term chart, and undoubtedly, in the years to come, so will the coronavirus falls.
As a consequence, the longer one is prepared to invest, the less risky it becomes and therefore the greater one’s actual and real returns can become, as equity markets have always weathered crashes, recessions and inflation – hence, taking a long-term view with investing can offer considerably higher returns and the best chance of beating inflation.
In comparison, while one may currently consider cash to be a safe investment, there is actually a far greater chance of its value being eroded by inflation as there are currently no cash ISAs offering to pay interest anywhere close to the current inflation rate of 7.9%. This basically means that one would lose money in a cash ISA – and we don’t believe this is likely to change.
As for the current high inflation rate, although it may not fit with the media headlines, it has peaked and is now coming down – and the media has made no mention of the fact that the UK’s Producer Price Index (PPI) (which measures the prices producers pay for their inputs) has turned negative and is now 2.7% less than this time last year. PPI inflation is seen as a leading indicator for Consumer Price Inflation (CPI) as producer prices obviously influence those charged to consumers.
This, coupled with this month’s 17% reduction in the energy price cap, means that we expect very shortly to see UK inflation fall sharply – in fact, we could easily see UK inflation end the year close to the Bank of England’s 2% target.
As such, we believe peak interest rates are actually a lot closer than policymakers are currently suggesting.
As interest rate expectations start to fall, this will not only reduce the returns obtainable in a cash ISA, but more importantly it will help equity market sentiment – and with equity market’s trading on attractive valuations, from a market perspective now could be a good time to add to your investments.
In short whilst setbacks tend to happen too quickly to ignore, progress often happens too slowly to notice… and progress is being made in controlling inflation, which in turn will see interest rates start to fall…and equity markets start to rise…we’ve seen it all before…
The path for equity markets can be prone to periods of fits and starts – and following the initial recovery in markets following the coronavirus induced falls, we appreciate there is a feeling of malaise as equity markets, while volatile have essentially traded sideways, but evidence shows investing should be about the time in, rather than timing, the market – and we believe history will show that this is an opportune time to be investing.
David Cassidy, CEO