Jeff Prestridge: cash is king but equities will prevail

Hands up now. Two years ago, did you predict that cash would now be king? No, I imagine, is the answer. It’s the one I would give.

But it’s a fact - cash now rules the roost. In the financial asset arena, it is the equivalent of Taylor Swift’s re-recorded 2014 album 1989 – a must-have.

Higher interest rates are primarily responsible for the current love affair with cash. With the base rate settled for the time being at 5.25% – compared to 0.1% in early December 2021 – cash is sexy again. A clutch of deposit takers are paying savers more than 5%. Santa and his helpful reindeers, it seems, have come early.

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There are also other factors at play. A difficult economic backdrop, fuelled by fears of a global recession and heightened geopolitical tensions, is causing many households to batten down the financial hatches and de-risk their wealth. As official figures confirmed last week, UK economic growth in the third quarter of this year ground to a halt.

As a result, saving, rather than investing, has become the order of the day. And with inflation now down to 4.6%, the lure of cash will not go away in a hurry.

And of course, the FTSE 100 index, the UK’s showcase index, is currently going nowhere. So far this year, it is down around 1% – and over five years, it is up a measly 7% excluding dividends. For the time being, it remains in limbo land. The FTSE All-Share index, the broadest barometer of UK share prices, has performed no better.

The result? Investment funds (unit trusts and open-ended investment companies as they are often known as) and stock market listed investment trusts are horribly out of favour.

According to data released earlier this month by global funds network Calastone, investors are literally heading for the hills. They are jettisoning investment funds – especially those with an equity bent – with a keenness matching that of guests throwing confetti at a wedding couple.

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Calastone’s data shows that equity funds suffered investor outflows in October of £1.2 billion – the biggest funds exodus since former chancellor Kwasi Kwarteng sent financial markets into a tailspin in September 2022 with his disastrous unfunded tax cutting mini-Budget. Most of the funds discarded last month had a UK or equity income investment focus.

As for stock market listed investment trusts, the fact that many of these companies now have share prices sitting at substantial discounts to the value of their underlying assets indicates that sellers outweigh buyers. There is little appetite for equity investments.

All understandable, all rather gloomy. And as much as it hurts me to say, it’s unlikely the mood music will change in the foreseeable future – especially given the uncertain political backdrop.

A cut in interest rates would help the UK stock market, but Bank of England boss Andrew Bailey seems in no rush to reduce borrowing costs. The quashing of inflation remains his goal and certainly the sharp fall in inflation from 6.7% to 4.6% was welcomed by markets.

A decisive UK government would help change the background noise – from Barber’s Adagio for Strings to Taylor Swift’s dance track Shake It Off (1989’s lead single). But there seems little chance of that considering the blistering attack launched by Suella Braverman after she was sacked by the prime minister from her position as home secretary. The Conservative Party is riven with factions, and in-fighting will remain the order of the day in the run-up to the general election which it looks like losing.

And conflict in the Middle East and Eastern Europe isn’t going away in a hurry.

Yet I still maintain that long-term wealth can only be built on equity foundations. While cash may be king for the moment, I am convinced that the case for long-term investing remains a robust one.

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A few days ago, I had the privilege to speak to James Thomson, manager of £3.4 billion investment fund Rathbone Global Opportunities. For the past 20 years, he has sweated blood for investors.

Despite dealing with market corrections and steering the fund through some poor years for investors (2008 and 2022 in particular), Mr Thomson has served investors well. Over the 20 years to November this year, he has generated a return of 880%. To put this into perspective, the average global fund has recorded a gain of 358% over the same period.

Impressive? Yes. But it was his utter faith in long-term investing that I found so compelling. Provided investors build diversified portfolios, don’t get spooked by market corrections, think long term, and only hold investments they truly understand (for example, shares in major UK retailers and well-established investment funds), Mr Thomson is convinced they can triumph. The long-term case for equity investing, he passionately believes, remains intact, especially as inflation starts to be conquered and interest rates begin to fall.

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The last word goes to Ben Kumar, head of equity strategy at Seven Investment Management. He sent me over a fascinating note on why we should all still be investing even though cash looks so appealing.

He says that between 1993 and 2007, the Bank of England base rate averaged 5.35% – a tad above the current level of 5.25%. The period was marked by geopolitical unrest in the Balkans and the Middle East – and UK government debt was almost spiralling out of control. Similarities with now.

Was cash king? No. Mr Kumar says that over this period, the FTSE 100 index (with dividends reinvested) produced an annualised return of 8.1%.

Despite all the turmoil, despite the attractiveness of cash, equities prevailed.

So, my message is clear. Keep investing into your pension and ISAs. Patience and commitment to the long term will be rewarded.  

As for the nation’s love affair with cash, I return to the glorious Taylor Swift. In her own words, it will soon be time to ‘Shake It Off’.

Jeff Prestridge is Group Wealth & Personal Finance Editor of DMGT.