We go on holiday to a remote area of Shetland every year. Last year, the talk was of little but fast-rising house prices and the need to get on the ladder as quickly as possible. This year, it was all about how the housing market had frozen, how prices might fall and how the young might find themselves in trouble having over-borrowed in their desperation to own their own flat. Final proof, were it still needed, that the bubble/bust cycle knows no boundaries.
Over the past year, we have put up with a parade of optimistic analysts touting investments thought to be immune from the credit crunch: prime London houses, the Chinese economy, the oil price, Bulgarian ski lodges, high-end cars, Europe’s bigger economies and so on. We aren’t hearing so much about any of this lot any more.
I haven’t been lectured about decoupling (the idea that the emerging world can keep growing at last year’s rates regardless of this year’s collapse in the economies of the west) since it became clear, even to China’s biggest fans, that collapsing consumption in the US means trouble for emerging market manufacturing. Here, we’re now seeing profits nastily squeezed between falling demand and a bout of persistent inflation.
Nor have I heard much about the merits of Europe as a safe haven. Spanish industrial production was down 9.5% year on year in June, house prices are coming off across the continent and, even in Germany, which for a brief period looked as if it might display a little resilience, manufacturing output is falling. The truth is, things aren’t much better in Europe than in they are in America.
Then there are commodity prices. The oil market has given up its obsession with tight supply and the number of cars forecast to be roaring around Chinese roads in 2020 and shifted its focus to falling demand across the west.
The oil price is now under $120. Most other commodity prices are moving in the same direction (the benchmark CRB index is down 15% in the last month). And as for luxury goods, note that sales of Aston Martins fell 44% in the UK last month.
This is all satisfying stuff if you have long been of a pessimistic bent (as I have). But, on the downside, it doesn’t leave much to invest in today. I’m all for buying commodities for the long term, just not now. The same goes for China and India. And I’m sure there will come a time when I am ready to move back into high yielding blue-chip stocks in the UK – it’s just that time isn’t quite yet, either. That leaves me mainly wanting to hold cash.
But there’s a problem with this. Holding cash makes sense if you can keep it in a deposit account making 6% plus.
But for many of us it isn’t that simple. Why? Because we hold most of our investments in individual savings accounts (Isas) or pension funds. And you don’t get much interest on cash held in them.
Check the website of your self-select Isa provider and, assuming you can find the rate it pays (they don’t make it obvious), odds are you’ll find you’re making more like 0.5% than 6%.
Some accounts pay even less: if you have les than £1,000 in cash with Barclays Stockbrokers you’ll get “nil”. Then look to your self-invested personal pension (Sipp) and you may well find things aren’t much better. The average interest rate on Sipp cash comes in around 1% below the base rate.
Unfortunately, there isn’t much you can do about cash held in an Isa. The providers are keen to point out that they are not designed as cash accounts. All money placed in them has to be invested at some point – which makes a decent interest rate on cash a low priority.
But that doesn’t take away from the basic fact that the provider is picking up the difference between the return you are getting and the market rate. The best you are going to get is something like the 4.6% paid out by Fidelity’s Cash Park facility.
However, it’s a different matter with Sipps. The average SIPP value is over £300,000 and brokers report average cash holdings of over 15%. So the rate you get here is a big deal.
In the past, we have all tended to look more at upfront fees, management fees and trading fees, but given that, according to Sipp provider James Hay, £500m plus is lost in poorly paying cash accounts every year, we may have been missing a trick: if you are getting 4% in interest instead of 6% on, say £40,000, your provider is effectively charging you 2%, or £800 a year, for nothing.
So where do you go? James Hay is currently offering an eSipp Special Deposit account paying 6.4% and Hargreaves Lansdown pays tiered rates rising to 5% if you have £50,000 plus on deposit. It also occasionally comes up with high interest cash options.
The most recent offered a one-year fixed rate of 6.25%. Alternatively, if you are keen to hold cash for a while, it might be worth buying short dated UK gilts, currently yielding around 5%, for your Sipp and holding them to maturity.
You will still be getting less of a return on them than you would in a Northern Rock account, but, on the plus side, you will have the minor satisfaction of knowing that your Sipp provider isn’t getting a cut of it.
• This article was first published in the Financial Times