Why cash is a key asset class in post-Brexit uncertainty

Jul 20th 2016

The Observer Money website published an article by our CEO Giles Hutson outlining the concept of cash as a key asset class for uncertain times.

The Financial Conduct Authority (FCA) this week published findings outlining the lowest interest rates offered by providers of easy access cash savings accounts, as part of its wider-cash savings market study, which found that some cash accounts and Isas are paying as little as 0.1 per cent.

However, the benefits and lure of cash as a reliable asset class has never been greater thanks to Brexit, which has sent shock waves of uncertainty throughout the UK and internationally, causing a great deal of economic and uncertainty in financial markets.

To reiterate the potential of cash savings, Paul Lewis recently produced a study that challenges the advocacy to invest in stocks rather than savings accounts for the long term. Lewis observed that over a 20-year period ‘active cash’ rewarded a higher return to investors than FTSE 100 stocks.

PROACTIVE CASH MANAGEMENT

However, as evidenced by this week’s FCA published findings, consistently finding the best rates is challenging. To achieve this, cash savings need to be more proactively managed which, as noted by the FCA, requires shopping around for the best rate.

In light of Lewis’s findings and in line with the current market volatility witnessed both before and after the Brexit vote, there are some recognisable and immediate trends to emerge in the cash markets. Firstly, cash positions are increasing significantly. Not only as both individuals and institutions switch out of more volatile asset classes, but also as they begin to accumulate cash based on delayed spending or investment plans.

Clients are looking to diversify counterparty risk. It is recognised that they are choosing to spread investments across multiple institutions, using the Financial Services Compensation Scheme (FSCS) guarantee to improve the safety of their savings or deposit.

Cash returns have improved relative to other asset classes, such as government bonds and a fully FSCS guaranteed cash portfolio of £300,000 can now be built to yield as much as eight times more than the equivalent UK government bond. For example, the UK two-year government bond currently yields 0.16 per cent, and yet by using a cash management provider savers can build a portfolio of £75,000 in each of four banks with an average return in excess of 1.30 per cent, while still benefiting from full FSCS protection.

The final trend to emerge is that interest rates are likely to remain lower for a longer, with experts now believe that the bank rate will remain at 0.5 per cent or lower as far into the future as 2020. Despite Mark Carney and the Bank of England resisting the temptation to lower the rate to 0.25 per cent last week in light of Brexit, there is still chance they could do so as soon as August.

Given the status of cash as a safe asset class, more so with the rise of FSCS protection up to £75,000, it needs to be proactively managed. Through active management of cash deposits across multiple banks and savings products, savers can help ensure improved returns on investment while reducing their exposure during these uncertain times.

Giles Hutson is co-founder of Insignis Asset Management, which offers active management of cash deposits.