Your IndustryJul 21 2016

Clients in cash should beware Brexit inflation risk

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Clients in cash should beware Brexit inflation risk

Mark Carney’s comments over the potential drop in the bank base rate to 0 per cent have caused some consternation among savers.

The governor of the Bank of England made his comments on 30 June, a week after the vote to leave the European Union.

At the time, Mr Carney announced there could be a further £250bn worth of quantitative easing poured into the economy should the need arise.

Although on 14 July the monetary policy committee (MPC) voted to maintain the bank base rate at its historic low - it first hit 0.5 per cent in March 2009 - industry commentators believe Mr Carney will cut rates, and it is just a matter of ‘when’.

While the MPC waits until August before it can determine with enough clarity the effect of Brexit, commentators have warned any cut to interest rates could hit insurance companies and pension funds hard.

A cut could also be detrimental for savers with significant cash holdings. According to Anna Bowes, co-founder of SavingsChampion, there have already been 4,500 cuts to cash Isas and savings accounts in the UK over the past few years, and a reduction in the base rate could see a knock-on effect across providers.

The vote for Brexit may exacerbate the gap between the current market offering and what clients are looking for in a rapidly changing economic climate Charles Owen

She explains: “Brexit has put cash holdings in an unprecedented situation.

“If the Bank of England’s base rates did fall, this would have a knock-on effect to existing savings accounts.”

However, she believes there has definitely been a separation over recent years when it comes to rate moves and providers’ decision to lower cash savings rates.

This has been highlighted in the latest Financial Conduct Authority report, Cash Savings: Sunlight remedy - October 2016, in which the City watchdog has highlighted the paucity of rates for Isas.

In its data, it shows there are some providers with accounts paying as little as 0.01 per cent interest.

The table shows the lowest interest rates offered by 32 providers of easy access cash savings accounts and easy access cash Isas - with Santander offering just 0.1 per cent for open accounts.

Table: Lowest interest rate offered on easy access cash Isas managed in-branch as at 1 April 2016
Applicable AER (%)Open accounts Closed Accounts
Aldermore BankN/AN/A
Bank of Scotland0.50.1
Barclays0.8N/A
Cambridge Building Society0.70.7
Clydesdale Bank0.7N/A
Co-op0.5N/A
Coventry Building Society1.41.5
Cumberland Building Society1.21.3
Danske Bank0.4N/A
First DirectN/AN/A
First Trust Bank0.25N/A
Halifax0.50.25
HSBC1.10.2
ICICI Bank UK PlcN/AN/A
Leeds Building Society10.5
Lloyds Bank0.60.25
Marks and Spencer Bank1.30.05
Metro Bank PLC1.251.4
National Counties Building Soc1.25N/A
Nationwide1.10.25
NatWest0.25N/A
Newcastle Building Society0.50.25
Nottingham Building SocietyN/AN/A
NS&IN/A0.25
OneSavings Bank1.11
Post OfficeN/AN/A
Principality Building Society0.6N/A
Progressive Building Society1.10.75
Royal Bank of Scotland 0.5N/A
Sainsburys Bank PlcN/AN/A
Santander0.10.5
Skipton Building Society10.5
Tesco BankN/AN/A
TSB0.20.2
Ulster Bank0.50.5
Virgin Money1.110.25
West Bromwich Building Soc0.5N/A
Yorkshire Bank0.7N/A
Yorkshire Building Society11

Highlighting the research, Christopher Woolard, director of strategy and competition at the FCA, says: “In a well-functioning market, providers should be competing to offer the best possible deal to consumers.

“Our sunlight remedy data shows some consumers could be better off by opening a different account.”

So, Brexit or not, cash savings products have already been hit - and if the result from the EU referendum vote is that rates drop further, this would pose a significant problem.

Ms Bowes adds: “You don’t need to see a drop in the base rate to see a drop in savings rates.

“It is also to do with the competition. Some lenders need to raise money from savers as they want to see more liquidity and get more people investing with them, so they may not drop rates.

“The key thing for savers is to be active with their cash savings and keep it on the move as much as possible.”

Currency and money market funds

Moreover, investors with significant holdings in funds which are dollar or euro-based may find the drop in sterling - which fell 7.6 per cent against the dollar on 24 June and sank to a 31-year low in the immediate week post-Brexit vote - has worked against them.

While most funds investing in overseas assets can be hedged back into sterling by the fund management group, not all funds are.

Being diversified across currency denominations will have helped some investors, while many overseas investments now look attractive in sterling terms.

Andrew Wilson, head of investments at Towry, comments: “Overseas investments now translate into healthy sterling-priced gains, and currency diversification has shown its worth.”

As Alan Mellor, managing director of Philip Bates & Co, says: “The fall in the value of the pound relative to the dollar has been one of the things most remarked upon in the news headlines and this will, if sustained, affect investments to a degree.”

The vote for Brexit may exacerbate the gap between the current market offering and what clients are looking for in a rapidly changing economic climate Charles Owen

However, following a new Conservative government put in place, sterling has regained slightly.

As at 18 July, the pound was at 1.3229 against the US dollar.

Michael Lally, director at Thesis Asset Management, says: “Given uncertainties, we believe the best way to play foreign exchange rates is through our overseas equity investments, by adjusting to either hedged or unhedged where possible, and where appropriate.”

Which way now?

Given the scares in the currency markets, and uncertainty over the direction of bank base rates, should clients be investing their cash into other areas and running down their weightings? Not according to Mr Lally, who adds: “We are firm believers in cash as an asset class”.

Ron Walker, managing director of Clarion Wealth Planning, says: “Clarion Investment Management holds allocations to cash over and above tactical cash, and money markets within its lower-risk portfolios.

“Beyond these strategic allocations, we would not recommend clients to encash their investments at a time of volatility and falling markets.”

Many investors moved into US-dollar denominated money market funds in the immediate week post-vote, with $24bn (£18.1bn) flowing into offshore US dollar MMFs during that time, according to data from ratings agency Moody’s.

Certainly, there is an argument for rebalancing portfolios to mitigate the effect of low rates from cash on the one hand, and high volatility from pure equity plays on the other, as Charles Owen, founder of CoInvestor, explains.

He says: “It is becoming increasingly clear traditional investment models are struggling to keep up with investors’ changing needs, and the vote for Brexit may exacerbate the gap between the current market offering and what clients are looking for in a rapidly changing economic climate.”

Marina Cremonese, a vice-president at Moody’s, says it it likely people may move cash out of accounts in the UK and into money market funds: “Money market fund assets will rise in the coming months, particularly in sterling funds, as the industry acts as a safe haven.

“Investors are likely to postpone investment decisions and cash-in-hand is likely to be directed toward liquid and low-risk asset classes. Managers positioned their portfolios conservatively in anticipation of the referendum vote, mainly by shoring up their liquidity.”