Rising inflation in the UK and impending rate hikes appear to be driving up the cost of living and endangering individuals’ wealth, prompting investors to rush to protect their portfolios.
Inflation in the UK rose to 3.2 percent in August, the largest monthly increase since the measurements began.
The Bank of England believes the spike will pass, but many are wondering if central banks are taking the rising cost of living seriously enough – and it seems the wealthy are also being complacent, with more than half saying they are don’t worry about inflation.
The ONS reported an inflation spike in August that was bigger than analysts had expected
As the market is now pricing in two Bank of England rate hikes for next year, the rising cost of living for UK households is starting to sharpen noticeably.
But YouGov research, conducted in conjunction with Canaccord Genuity Wealth Management, suggests that more affluent people aren’t taking the risks to their wealth seriously enough.
The survey of 1,006 high-net-worth individuals – people with £750,000 in savings and assets, excluding their primary residence – found 55 per cent not concerned about the impact of inflation on their savings and investments.
The Bank of England is expected to raise interest rates twice in 2021 in response to rising inflation
Head of Wealth Planning at Canaccord GWM David Goodfellow said: ‘The simple economic rule dictates that if interest rates are below inflation, inflation will erode the real value of your savings over time.
‘If savers have a surplus of liquid assets, they would probably do better to invest at least part of it in a diversified portfolio.’
Many high net worth individuals have large amounts of their money in cash accounts, which yield minimal returns with the lowest interest rates. Even the best easily accessible savings deal pays just 0.65 percent — far below the rate at which inflation erodes the value of cash.
But even those who invest may be at risk. Within portfolios, investor exposure to bonds would be the most likely victim of rising inflation, especially if those bonds have low yields and are priced for an extended period of low interest rates and accommodative monetary policies.
Long-term bonds are the most sensitive to interest rate movements and investors can be prepared for further volatility in the coming months.
In terms of equity investing, there are some stocks that could outperform others in times of inflation.
Mirabaud Group deputy director John Plassard explained that looming rate hikes would likely act as a “big tailwind for UK lenders”, while rising interest rates would put “significant weight on companies in sectors such as utilities and property.” sensitive to rising bond yields’.
Chief Analyst at Charles Stanley Direct Rob Morgan advises investors to favor companies with pricing power, which allows them to pass on rising costs to consumers and protect their profits against inflation.
He added: ‘Banks are also a potential beneficiary of higher interest rates, as they can earn a greater amount from their deposit and lending activities.
“Inflation caused by rising commodity prices can also be absorbed directly in a portfolio through some exposure to the mining and energy sectors.
“The UK stock market has a lot of exposure to commodities and banks, while Japan has a lot of financial and industrial stocks that can benefit from a strong global economy and a little inflation.”
Gold is often cited as an inflation hedge
Gold has often been touted as the ultimate inflation hedge, but Morgan explained that this isn’t always the case, especially in the short term and when interest rates are rising. In these circumstances, gold can be a portfolio diversification, but it can also be very volatile.
Real estate funds with exposure to assets such as warehouses, logistics, data centers and healthcare real estate are a good option to build enough income and capital appreciation to outpace inflation, Morgan explained, while infrastructure assets “often have some degree of contractual inflation protection built into” .
Finally, while investing in bonds may seem counterintuitive at a time of rising inflation, Morgan highlighted an alternative within the asset class.
He said: ‘Unlike conventional bonds, index-linked or inflation-linked bonds provide income that rises.
“They usually offer some protection against a rise in inflation expectations, although they can get expensive when many investors want to protect themselves from this risk and drive prices up – so they don’t always work as a hedge.”
How the rich view inflation
The Canaccord and YouGov study found:
Wealthy individuals view inflation as the second greatest threat to wealth:
25% of respondents think inflation is the biggest threat to their finances, second only to 31% market volatility and 20% tax hikes.
Inflation is seen by men as a greater threat to financial security:
32% of HNW men see inflation as the biggest threat to their finances, followed by market volatility (26%) and rising taxes (22%).
Women are less concerned about inflation (19%) and tax increases (18%), but most see market volatility as the biggest threat (36%).
However, this is an unfounded concern – Goldman Sachs research showed an average 10-year market return of 9.2% over the past 140 years, compared to a real depreciation of 12% over the past ten years (£1,000 in cash in June 2011 would be worth £877 in real terms in June 2021 based on the Bank of England base rates and adjusted for inflation).
More than half (55%) are not concerned about the impact of inflation on their savings and investments:
44% of HNWIs are concerned about the impact of inflation on savings and investments, while 55% are not worried at all.
42% of women are concerned, compared to 46% of men.
Nearly a quarter (23%) have saved a pot of cash of over £20k since the pandemic:
25% have accrued between £5,000 and £19,999 as a result of lockdowns, 15% have accrued between £20,000 and £49,999 and 8% have saved more than £50k.
Pandemic money burns a hole in the pocket of HNWIs:
When it comes to saving money from the pandemic, 41% plan to spend their pot of cash, 27% plan to invest it, but 18% plan to keep it cash.
The rich underestimate the impact of inflation:
When it came to the value of £1,000 in the bank, wealthy individuals estimate it would be worth £1,404 after ten years. In reality, over the past ten years, a pot of £1,000 would have devalued due to inflation to £877 in real terms.
Men were more optimistic than women with an average of £1,470, compared to £1,336 for female counterparts.
Cash still thought it was king for a minority:
For those who wouldn’t invest their pandemic cash, 14% would choose to keep it cash because they think it’s safer, or because they think they’d get a better return on it.
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