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.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.