The silent assassin of cash savings is back The silent assassin of cash savings is back The silent assassin of cash savings is back

The silent assassin of cash savings is back

Søren Otto Simonsen

Senior Investment Editor

Summary:  Inflation - the killer of cash - is back with a vengeance. This can have an immediate effect on your savings, but it also gives way for some interesting investment opportunities.


Global equity markets have had a historically good run since the financial crisis but have recently been halted by the silent assassin of cash savings – inflation. While the US central bank, the Federal Reserve, believes that the spike in prices is “transitory”, we believe that it could be a more long-term trend. “When you look at the components of the current inflation, we believe that it is structural, i.e., that it is here to stay, and not just a temporary bump on the road, which is an important distinction, when you evaluate the equity markets.” says Peter Garnry, Head of Equity Strategy.

Garnry further mentions that the very aggressive inflation we have now is likely negative for equities: “Some inflation is good for equities, but the high rates we see right now forces the central banks to react and tighten financial conditions. That’s bad news for equities, especially the ones that have seen heavy growth the past few years, because it increases the discount rate on free cash flows which in turn reduces equity valuations," he says.

What the picture above shows is that in the US, inflation has drastically increased in the end of 2021, but the American central bank, the Federal Reserve, is yet to adjust the so-called target rate. If inflation stays high, the Fed is bound to increase it, which could be a challenge for equities.

The ultimate financial pickle
When we call inflation the silent assassin of cash, it is because that is exactly what it is. Inflation means the increase in prices in society over time and is an important measure for how society – financially – is 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 10,000 USD to buy a new car. The car you want costs 10,000 USD, but you decide to wait a year to have a bit of buffer. Next year – if inflation is at 2 pct. – the car will instead cost 10,200, so if you haven’t saved 200 USD dollars more, you can’t afford the car anymore. While 200 dollars in a 10,000-dollar 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 then 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 what is called 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,” Garnry says. 

You can get more inspiration from our Chief Investment Officer, Steen Jakobsen’s, 100-year portfolio here, where he looks at how a more inflation-prone portfolio could look. 

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. 

Looking at his own equity baskets, Garnry sees large discrepancies: “What you need to look at when evaluating stocks at a time like this is whether their valuations seem too high. I 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 I believe 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,” he says. To see more about which equities have performed well during the recent inflation, read this article.

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.