The silent assassin of cash savings is back

Historically speaking, global equity markets have had a good run since the financial crisis despite the blip due to the pandemic. However, recently this bull market has been somewhat halted by the silent assassin of cash savings – inflation. The Bank of England used its primary weapon against inflation – interest rate increases – twice in 2022.

This has not happened since 2004, indicating how serious things are.

The ultimate financial pickle

When we call inflation the silent assassin of cash, it is because that is exactly what it is.

Inflation is an important measure for how a society is financially evolving. But even though it is seen as an important and positive part of the global financial infrastructure today, it is less positive for large cash reserves and savings. Because when prices increase it means that you can buy less for your savings.

Let’s look at this example – you have saved up GBP 10,000 to buy a new car. The car you want costs GBP 10,000, but you decide to wait a year to have a bit of buffer. Next year – if inflation is at 2%. – the car will instead cost 10,200, so if you haven’t saved the extra GBP 200, you can’t afford the car anymore. While GBP 200 in a 10,000 pounds budget might not seem like a lot, the compound price increases over time can be significant. That is why banks in general will advise you to invest your money, as the potential positive return you might get over time can help you keep your purchasing power.

But what do you do in a situation where your cash savings are being killed by inflation faster than usual and the equity market seems to be trending down at the same time? “Generally, it is probably time to revisit your asset allocation. This means the mix of investment assets like stocks, bonds, etc. as it could be time to move some money from equities into other instruments,” Peter Garnry, our Head of Equity Strategies, says. 

If you have a long-time horizon and still think equities is the way for you to go, some sectors seem better suited than others when interest rates increase and where uncertainty roams the financial landscape. 

“What you need to look at when evaluating stocks at a time like this is whether their valuations seem too high. At Saxo, we believe that growth pockets like e-commerce and bubble stocks will continue to suffer, as will tech-sectors due to the continued semiconductor-shortage, whereas crypto, logistics and semiconductors might be winners. Apart from that, a situation like this generally suggests that high-quality, usually very large companies will do better than smaller ones.”