In focus - Economics

Market turmoil: Is now the right time to save or invest?

Leading experts, including Schroders' Head of Income Solutions Rupert Rucker, join the 'big money debate' in The Times.

4 January 2019

This article was written by The Times in December 2018. All views and opinions are those of the publication unless otherwise stated.

With savers seeing almost no return on their cash in banks, many are turning to stock markets – but could they be heading for a fall? 

In the decade since the financial crisis, the Bank of England, like other central banks, has determinedly kept interest rates low to protect the UK economy. Even after two interest rate rises over the past year or so, the Bank’s base rate currently stands at just 0.75%.

That means savers with cash in a bank or building society are almost certainly losing money once you take into account the effects of inflation. And for those who depend on their savings to generate a stream of income, this era of low rates has been particularly pernicious.

As a result, many savers and investors have felt compelled to move their money into assets offering the potential for better returns, whether from capital growth or from more attractive yields. For many, that has meant investing in the bond and stock markets.

However, such investments carry a risk not associated with cash savings: the value of bonds and shares can fall as well as rise. And while 2017 was one of those golden years in which markets seemed to rise inexorably – shares in particular increased in value month after month – 2018 was a different story. Volatility returned to global markets.

For savers and investors not accustomed to the ups and downs of the market, this has the potential to cause real discomfort. Income seekers who felt they had little choice but to look further afield for more attractive yields are now worried that their hard-earned savings could suffer a serious fall in value. So are their fears well founded? And should they be worried about their savings?

Yes

Gavin Lumsden, Editor-in-chief, Citywire, said: "Income investors are often told they get paid to wait, and that the regular interest and dividends they receive from their investments make up for the ups and downs of the stock market. Now is the time to put this patience and resilience into practice, because the likelihood is we'll have more downs than ups as markets get used to rising US interest rates.

"Signals from the US Federal Reserve in 2018 that it intends to accelerate rate rises due to the strength of the economy provoked two big stock market sell-offs. The Fed's moves are significant because they mark the end of the extraordinarily loose monetary policies pursued by central banks around the world since the 2008 financial crisis.

"In the past decade, the near-zero rates on cash have pushed people into stock and bond markets in search of yield. Now the Fed is leading the way in unwinding the quantitative-easing experiment, and prices are wobbling.

"This is not the end of the world or the start of a new financial crisis. But it is a painful transition for income investors. Keep your eyes on those coupons and dividends, because they may be the silver lining in quite a stormy stock market."

No

Jason Holland, Managing Director, Tilney Investment Management Services, said: "Years of ultra-low interest rates and dismal bond yields have, in recent times, certainly enticed more income-seeking investors into the equity markets in search of yield. That has, of course, left them exposed to short-term stock market volatility as we have seen in recent weeks

"Let’s not forget though that the bond markets have also endured some turbulence too, but have a lot less recovery potential at a time when interest rates are rising across the globe.

"While it is unnerving to see share prices slide as they did in October, much of this is driven by short-term sentiment. History suggests that markets tend to overshoot in such phases. Importantly, the outlook for global growth remains sound, and shares are not expensive compared to the long-term trend, which is rarely the starting point for a sustained downturn.

"In the case of UK and emerging markets equities, valuations are actually cheap and dividend yields are really attractive. Importantly, unlike bonds, dividends from shares have the capacity to grow over time and are not fixed. That makes shares a vital component of an income portfolio, as they offer the potential for income distributions to grow ahead of inflation."

Lessons from history

Rupert Rucker, Head of Income Solutions at Schroders, said savers and investors seeking income have no choice but to look beyond bank and building society deposits.

"It’s easy to cast your mind back wistfully to the two decades or so prior to the financial crisis, when interest rates were high enough to mean savers and investors could earn a decent income from bank deposits. But in historical terms, that period was an anomaly: over the previous 200 years interest rates were rarely so high. And there’s no reason to expect a repeat, with central banks in no mood to raise rates aggressively – and with banks that have little appetite to seek funds for lending feeling no need to attract savers.

"The reality is that anyone looking for meaningful income has to look beyond deposits. And there are no tiny steps: you’re going to have to make the leap into bond and stock markets.

"If that feels uncomfortable – at any time or in the current market environment – it’s important to understand the role that time plays in mitigating risk. If you’re prepared to commit to investing for the long term, and to remaining patient, these markets are much easier places to be. Even if you’d invested right at the peak of the stock market in 2008, just before the crisis wiped almost 50 per cent off the value of shares, you’d have recovered your losses within five years. 

"Diversification is important, so you’re not putting all your eggs in one basket, and a professionally run collective fund can help here. Even risk-averse investors have much to gain from using these vehicles to access new sources of income.

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