27 April 2023
Cash savings rates are still much lower than the annual inflation rate, which measured 10.1% in March using the Consumer Prices Index (CPI) number favoured by the government or 13.5% using the older Retail Price Index.
Rob Burgeman, investment manager at wealth manager RBC Brewin Dolphin said, “One of the benefits of the rise in interest is the higher rates on offer for your cash savings, however cash savings rates, are unlikely to match these heightened inflation figures, meaning that what you can actually buy with your cash is actually going down.”
Rob Burgeman said, “Inflation results in the ‘real’ value of your money declining as price rises erode its purchasing power. £1,000 of cash would have dropped in value to £858.73 after five years, with real inflation at 3%. But with real inflation at 10%, the £1000, would only be worth £590.40, after five years.
For savings over and above your emergency fund, it’s really important to look for ways to mitigate the impact of inflation over time. Although the stock market is volatile and investing comes with risks, history shows that over long periods it tends to perform more strongly than cash and above the rate of inflation.”
Although rising interest rates are typically considered negative for investments, because higher interest rates <em>tend to negatively affect earnings and stock prices, </em>this doesn’t alter the long-term case for investing. The economy tends to go through different interest rate cycles – sometimes they are relatively low and sometimes they are relatively high – and the timing of these cycles can vary from one country to another. In addition, different sectors perform differently in changing economic conditions.
Rob Burgeman said, “When the economy is doing well, very growth-orientated sectors – housebuilders, for example – tend to do very well, while when interest rates are rising, more defensive areas – e.g. like pharmaceuticals – do much better. This is why it’s important to diversify your portfolio, not just by asset class but also by region and sector.”
In an environment where interest rates are rising, bonds, like gilts and corporate bonds tend to underperform, because most bonds pay a fixed interest rate, which becomes less attractive when interest rates rise. This, in turn, reduces demand for, and the price of, the bond. Bonds with longer maturities are generally more sensitive to interest rate movements than bonds with shorter maturities. So ensuring you diversify across a range of bonds with varying durations can help to mitigate interest rate risks.
Stocks aren’t directly affected by interest rate hikes, but they are sensitive to them for several reasons. Investors may feel they would be better off leaving their money in cash instead of riskier equities. Higher interest rates can increase the cost of debt for companies and their customers, resulting in reduced profits or a decrease in sales. Rising interest rates also tend to eventually slow economic growth, which has implications for corporate profits. The impact of rising interest rates varies from one sector to another, which is another reason why it’s important to have a well-diversified portfolio.
Rob Burgeman said, “Rather than basing your investment decisions on interest rates – which are just one factor affecting performance – your best bet is to focus on your long-term goals and ensure your portfolio is managed by an expert with experience of different economic cycles.”
“Good quality financial advice will also help you to navigate through the often stormy waters of the world of investment. Interest rates and what you can earn on deposit are important things, of course, but what is really important is that your capital keeps pace with inflation over time and is worth what you need it be worth, when you need it.”
– ENDS –
Disclaimers
The value of investments can fall and you may get back less than you invested. Information is provided only as an example and is not a recommendation to pursue a particular strategy. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance. RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444).
PRESS INFORMATION
For further information, please contact:
Richard Janes richard.janes@brewin.co.uk / Tel: +44 (0) 20 3201 3343
Siân Robertson: Sian.Robertson@brewin.co.uk / Tel: +44 (0) 20 3201 3026
Chloe McFarlane: chloe.mcfarlane@brewin.co.uk / Tel: +44 020 3201 3490
Payal Nair payal.nair@brewin.co.uk / Tel: +44 (0) 20 3201 3342
NOTES TO EDITORS
About RBC Brewin Dolphin
RBC Brewin Dolphin is one of the UK and Ireland’s leading wealth managers and traces its origins back to 1762. With £51.7* billion in assets under management, we offer award-winning, personalised wealth management services from bespoke, discretionary investment management to retirement planning and tax-efficient investing.
Our qualified investment managers and financial planners are based in 33 offices across the UK, Jersey and Republic of Ireland. They are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
As part of Royal Bank of Canada (RBC), we are now able to draw on the strength of a global financial institution to continue to improve the service we provide to our clients and drive further innovation across our business.
*as at 30th June 2022.