FALLING interest rates might be good for borrowers but there is a worry that savers are being punished, according to Spearpoint’s Kevin Boscher (pictured).
The Bank of England cut interest rates to 1.5% last week, the lowest level in its 315-year history, and while borrowers may be relishing the news, a growing proportion of the population who are living off savings and the interest on their deposits will be forced to look for alternative investment solutions rather than the traditional savings account, according to the chief investment officer.
‘Interest rates globally have been slashed and still have further to fall,’ said Mr Boscher.
‘This is great news for borrowers as the cost of borrowing has collapsed, but is a disaster for savers.
‘So far authorities have done very little to redress the unfairness, which is a direct result of punishing the prudent saver to bail out the reckless borrower.
‘Falling interest rates continue to make the returns available on cash deposits decidedly unattractive.’
He said that banks, which were struggling to rebuild their damaged balance sheets and restore profitability, had already made substantial reductions in their savings rates.
And while many equities offer attractive yields, questions remain regarding the sustainability of dividends.
Mr Boscher said the substantial rally equity markets were likely to enjoy at some point in 2009 was likely to be a ‘cyclical bear market rally’ as the world economy still faced large imbalances and substantial headwinds.
He believed volatility was likely to remain and that equity risk would be too high for many income investors, particularly the elderly, but added that alternative investment solutions were available.
‘One of the most attractive options in the current climate is corporate bonds, especially in investment-grade issues, rather than the traditionally risk-free government bonds, which are set to deliver low yields for some time to come due to concerns over deflation and continued de-leveraging.’
Like equities, corporate bonds were heavily sold last year as investors feared a big increase in corporate bankruptcies and a recession that would result in a substantial rise in the corporate default rate.
‘The sell-off has been so dramatic that credit spreads are not only standing at record highs but are also discounting an increase in default rates comparable with the Great Depression in the 1930s.
‘In our view, this is simply too pessimistic and corporate bonds are currently offering investors a very significant investment opportunity.’
However, investors are warned to be highly selective when buying corporate bonds and to take professional advice.
‘A carefully constructed portfolio of quality corporate bonds can deliver attractive relative and absolute returns,’ he added.
Article posted on 13th January, 2009 - 2.30pm
7 Article Comments
Very old and much publicised news……….
Suggested solutions would be helpful.
Or is this just advertising?
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The Press of late have carried a number of articles where some pundit has said something that was previously said, a few days previous on “You Shout”
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I am a retired person in England who regards my ’savings’ as my private pension fund. When my wife and I had a mortgage the rate was always in double figures and we made sure that we could afford it; now my fund’s interest is falling to zero.
This is not a good enough return and I have been looking around the world, via the internet, for a better investment. Brazil for example, or France, to take advantage of the future further falls of the pound against the Euro. I certainly no longer trust the pound. For example, any one with £100,000 in Euros would have seen an increase of value to around £140000 over the last twelve months.
I do not understand why the interest has been reduced, it can only lead to a loss of capital to Britain and a consequence of a slump, as happened in the last century. The pound has already followed the dollar down to a drastic revaluation that must lead to seriously increased inflation.
Is this all being done to delay the bankruptcy of badly managed banks and a minority of property developers/dealers and stupid mortgage holders who have over-borrowed; and maintain the unrealistically high property prices? I would have thought that it would be better to get the bankruptcies done to get rid of the incompetent, and place their business in more competent institutions and cleverer people.
The removal of the incompetent banks and the drastic reduction of property prices to affordable levels would be a much securer long term solution. We have had a very long period of continued inflation, it is time for a period of deflation to balance things up and bring about a stable value of our money for future generations. It is grossly irresponsible to allow the continuous inflation of prices that erodes and devalues the value of every one’s money and gives future generations very little to build on.
As a person who owns the money I am not satisfied with any interest below 5% pa, and if the interest is not returned rapidly I will take it to where it is more valued, and respected; which will not be the stock market, but rather abroad, or property when it falls far enough. Then the UK lenders will not be able to offer cheap loans because they will not have the money to do so.
If things continue as they are now, then the UK’s financial institutions and people’s personal savings are going to be nationalized, as were the coal mines, the railways, the car manufacturers, the steel industry, and the defence industry, and where are they now?
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We know savers are suffering. A more interesting article on this topic may be to ask the Treasury how it will compensate for the loss of budgeted interest income on their own cash investments, and reduction in income tax revenue from Guernsey tax payers who have money in the bank. How will they cope with this income reduction and be able to pay for all the capital projects in the pipeline?
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Sage99,
You should take some financial advice from a professional before going ahead with any of the things that you are contemplating. Converting your Sterling to another currency to take advantage of higher interest rates is a very dangerous game. You mention Brazil as a country that you have looked at. If you had sold Sterling and purchased the Brazilian Real on 3rd Sept 2008 you would have lost 47% of your capital on paper by 8th October 2008. Many people have converted their base currency to another to chase higher interest rates, only to find that for an extra few percent interest they have lost 20 or 30% on exchange rate movement.
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George
Thank you for your advice which is much appreciated. The devaluing of currency is a major concern, and I have been very shaken by not only the collapse in UK interest rates, but also the drop in Sterling. I no longer regard the UK as a stable and safe place, hence I am looking abroad, and am viewing the Euro.
I am also very concern by the inflation rate which, in my expenditure, is very much higher than the official one. As a real inflation rate of 5% pa will reduce any fund by around 50% in ten years, the reduction of interest rate means that money will not hold it’s value in the UK in the foreseeable future.
The stock market has been a complete loss to my father and grandfather, and I lost money that I tried in it, as have friends.
Property is very high so now is not the time to invest as it can only come down, so what are the ordinary people to do with any money they accrue ?
As this century appears to be a re-run of the last, I have been researching the situations of the people in that era, including my own family, to see what they did to survive. To date, the results have been worrying, and I view the future with mounting alarm.
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Just another case of the rich robbing the poor. Or the clever robbing the prudent. So far the banks and the government have robbed us of 30% of our savings and we know we wont get it back. So nothing changes there
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