· Almost a third of investors have increased their exposure to cash in the past year in response to high interest rates.
· SJP expects further rate cuts following August’s Bank of England reduction, but not aggressive reductions to near-zero levels – instead, slow and intermittent reductions are anticipated, resulting in rates stabilising higher than in recent history.
· Investors should begin to consider reducing their cash holdings and reallocating funds into higher-yielding assets to best achieve their long-term financial goals.
Three in ten (30%) UK investors made additional investments in cash in the past year because of high interest rates, new research from St. James’s Place (SJP) has revealed. This compares to 12% who increased their exposure to equities during this time, and 12% who invested more in bonds.
Looking forward, SJP’s research – which surveyed 1,000 UK investors shortly before the Bank of England’s decision to cut interest rates for the first time in four years – found that almost a quarter of investors (23%) plan to make additional investments in cash over the next year if interest rates remain high. This contrasts with 14% who plan to invest more in bonds and 13% who plan to increase their exposure to equities.
SJP’s analysis of the performance of equities, global bonds and cash over the past 20 years found that remaining invested in markets delivers better long-term outcomes than increasing cash holdings. Since 2004, for example, equities have seen a cumulative return of 566% compared to the 96% delivered by global bonds and 43% by cash.
Source: Data to August 2024. FE fundinfo. Equities represented by MSCI ACWI, Bonds by Bloomberg Global Aggregate Bond Index, Cash by BoE base rate. Currency: GBP
These findings are amplified when considering the impact of inflation. SJP research also shows that large cap stocks have consistently provided returns in excess of inflation over the last 5, 10, 20 and 50 years, while cash has only just delivered a return of 1% in excess of inflation when looking over the 50-year time period, compared with 8% delivered by small cap stocks, 4% by corporate bonds and 3% by government bonds.
Source: Stocks represented by Ibbotsonâ SBBIâ US Large-Cap Stocks, Corporate Bonds by Ibbotsonâ SBBIâ US Long-term (20-year) Corporate Bonds, Government bonds by Ibbotsonâ SBBIâ US Long-term (20-year) Government Bonds, and Cash by Ibbotsonâ SBBIâUS (30-day) Treasury Bills. Data – 31 May 1974 – 31 May 2024. Morningstar Direct, accessed via CFA institute.
Nina Stanojevic, Senior Investment Specialist, St. James’s Place commented: “August’s interest rate cut to 5.0% marked a pivotal moment. We foresee more cuts but not a drop to near-zero levels. Rates will likely stabilise above pre-pandemic levels.
“This ‘higher for longer’ trend affects asset classes differently. While cash has been attractive with high rates, as our analysis shows, inflation erodes its value over time, potentially hindering long-term goals. Investors should use this rate cut as a wake-up call to diversify and consider higher-yielding assets such as equities and bonds.
“A diversified portfolio across asset classes and geographies is crucial for meeting long-term objectives. Equities offer attractive risk-adjusted returns, and bonds are appealing now due to higher yields, providing a chance to buy high-quality bonds at favourable rates.
“While recent market volatility may understandably be a cause for concern amongst investors, the current opportunity to “buy the dip” and get back in the markets at a time when prices are relatively low, provides a good re-entry point for many. Ultimately, investing is for the long term and it’s important not to get too caught up in trying to time the market, and instead keep focused on your long-term goals.”
