money management

The opportunity cost of cash

One upside to the steady stream of central bank rate hikes is that higher interest is now finally being paid on cash savings. After years in which returns on cash were virtually zero, savings accounts paying over 5% may sound appealing, but is cash an answer for your long-term goals?

Cash might be particularly appealing given it comes after three long and difficult years. First, we had Covid-19, which felt like the world as we knew it was coming to an end. Then, just when we thought we were returning to normal times, Russia invaded the Ukraine and almost simultaneously, after years of ultra loose monetary policy, inflation assaulted our economies. Interest rates, which had remained at historically low levels since the financial crisis in 2008-09, suddenly started to rise as central banks increased their base rates to battle rampant inflation. With thirteen base rate rises in the UK alone since December 2021, cash now offers a decent rate of return, so can it be a welcome shelter from the turbulence of financial markets?

There is no straightforward answer that covers all scenarios. Much will depend on your financial circumstances, composure when faced with volatile returns, and time frames, but as a general rule cash is not a suitable long term investment. This is true in general, but particularly now.

Cash – the smiling knife

There is no doubt that cash feels safe. But what is the price demanded for that safe, comfortable feeling? Is it robbing you of opportunity?

Whether you’re invested and tempted to move your money into a savings account, or whether you’re a long-term cash holder who has been waiting for an opportunity to invest but now finds cash looks attractive, there are a few things you should consider:

Cash is returning significantly less than inflation – you will be accepting a real term loss with immediate effect until inflation drops (at which point cash rates are also likely to drop). A gap as low as 3% between your returns and the inflation rate would halve the value of your money over 24 years.
Ah, I hear you say, but I don’t intend to hold cash over 24 years. This is only temporary. OK, I would answer, but when you do decide to jump from cash back into the stock market, it’s likely you’ll pay a lot more for the shares you buy. Why? I’ll cite just two out of a number of reasons:

The maxim of “buy low, sell high”. Aside from a handful of technology stocks (Nvidia being the prime example) equity valuations are either fair value or cheap. This is the time to buy, not to sell. Would you sell in a housing slump? Probably, not. Neither should you sell in a stock market slump.
Markets are rising 80% of the time.* This means that when you can no longer get the current rate on your cash deposit, you might look back at today’s prices and wish you had invested more now.

If you’re currently invested, it’s also worth remembering that while the bottom number on your investment statement may have moved up and down rather uncomfortably recently, any losses are not locked in unless you decide to sell.

It’s also worth remembering that our portfolios are so highly diversified that the likelihood of significant, permanent loss of capital is minimal. In fact, the biggest risk to your capital is the human tendency to sell at the wrong time.

Capturing the opportunity

It’s easy to get caught up on the negative headlines, particularly as there’s a tendency not to publish positive news, but it’s inevitable that threats breed opportunities.

Our focus is on managing the threat and capturing the opportunity. Environmental change, an aging population, a shift in spending patterns, artificial intelligence – all of these are long-term opportunities which we are nurturing within your portfolios and can exploit, along with opportunities the market throws at us to buy cheaply.

Below are four key areas of change where we currently see investment opportunities:

Everyone’s circumstances are different and there might be good reasons to hold some of your assets in cash. But you should always consider this as part of a professionally thought-out financial plan, often in conjunction with your wealth planners, tax advisers and legal specialists.

If turbulent markets are causing you concern, or if you feel now might finally be the time you have been waiting for to invest, speak to your private banker. They can explore your options, including cash, and ensure they still match your appetite for risk and your long-term financial goals.

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand more about how we manage money on their behalf, or call +44 (0)1624 645000 to speak to our client services team.

If you would like to find out more about how we manage clients’ investments, please contact us on the same number as above. Or you can get in touch using the forms linked towards the end of this page.

Sources: Fidelity – Here’s how to defeat inflation, Nedbank Private Wealth: MSCI World, 12 month periods – March 1990 – December 2018

Investments can go down, as well as up, to the extent that you might get back less than the total you originally invested. Exchange rates also impact the value of your investments. Past performance is no guide to future returns. Any individual investment or security mentioned may be included in clients’ portfolios. They are referred to for information only and are not intended as a recommendation, not least as they may not be suitable. You should always seek professional advice before making any investment decisions.

Rebecca Cretney

Rebecca joined Nedbank Private Wealth in May 2004 having moved to the Isle of Man from Barcelona to pursue a course in Business Studies with the Isle of Man Business School. She worked as a private banker until 2019, when she was appointed to the role of investment counsellor. Rebecca now focuses exclusively on supporting private bankers in conversations with their clients, providing technical investment expertise where more complex portfolio requirements exist. She also provides coaching and training for the private banking teams on a wide range of subjects surrounding investment and advice. In addition, Rebecca chairs the bank’s Investment Committee.

Rebecca is a Chartered Fellow of the Chartered Institute for Securities & Investment and a Chartered Wealth Manager.

Planning for a century

As more of us reach the age of 100, financial planning is vital to ensure we have enough money to fund our lifestyles through a potentially long retirement.

Reaching the age of 100 may seem a rather fanciful prospect but if you were born in 1974 in the UK, as I was, your chances of becoming a centenarian are 20.4% if you’re a woman and 13.9% if you’re a man. Based on the latest estimates from the United Nations, there were 593,000 centenarians around the world in 2021 and it’s a fast-growing age group. Studies estimate there could be 3.7 million centenarians alive by 2050.

Better healthcare and lifestyles around the world, along with luck in the genetic lottery, play a big part in increasing longevity. Yet there is still no way to accurately predict how long any of us will live and this is a crucial factor when it comes to planning your finances. How do you ensure you have enough money to fund your lifestyle through a potential 30-40 year retirement?

Here are six things to consider when preparing your wealth for a long life well lived:

1. Define your long-term financial goals

Talking about money and your aspirations with loved ones is key to understanding what you want from life – for yourself and your legacy. Defining this will help build a framework for managing your wealth to achieve these goals.

2. Make your pension a priority

Pensions can be one of the most efficient ways to save for your retirement, so it may be worth ensuring you make the most of your pension allowances. In the UK, the benefits include tax relief on your contributions and tax free growth of the investments within the pension. In addition, pension funds do not form part of your estate when you die and are therefore free from UK inheritance tax. If you have a number of pensions, it may be worth consolidating them, although the associated risks and charges should be considered. Taking advantage of ISAs is another tax-efficient strategy for long-term financial planning in the UK.

3. Invest for the long-term

The power of compounding and diversification make investing for the long-term one of the best ways to grow your wealth. Make sure you are comfortable with the investment risk in your personal portfolio, and it is suitably diversified to meet your needs.

4. Contingencies

If you live to age 100, there are likely to be a few unexpected events along the way. However, the financial impact of these can be considered and options such as life insurance, income protection and critical illness cover can help to protect your wealth and provide peace of mind for you and your family. Life expectancy may be improving but it is no guarantee of good health, so the possibility of long-term care should also be considered.

5. Estate planning and gifting

As well as managing your wealth during your lifetime, it’s important to consider how it will be managed after you’ve gone. The first step is to ensure you have an up-to-date will or wills (if you have assets in more than one jurisdiction). Whether you plan to pass your wealth on to your family or have philanthropic ambitions, considering your options and putting the right structures in place is vital to ensure a smooth, efficient transfer. Structures such as trusts, family investment companies and donor advised funds may be appropriate.

6. Make a wealth plan

Having considered your goals and values, creating a wealth plan will allow you to visualise the financial route you need to take – right up to age 100. Using specialist cashflow software, a wealth planner will work with you to define your current and future financial circumstances and align them to your goals and values, enabling more informed financial decisions. We call it ‘investing with purpose’. The future is never certain, and your wealth plan can explore various scenarios to stress test situations. This means you can be as prepared as possible for the unexpected. Your wealth plan should be flexible and with regular reviews it can be adapted as markets, fiscal regimes and your personal goals and circumstances evolve.

At Nedbank Private Wealth, we can partner with you to understand your financial goals and create the most appropriate wealth plan. We work with clients and their families around the world, in tandem with their professional advisers, to help them achieve a life well lived – all the way to 100 or more!

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how wealth planning can help them achieve their financial goals and objectives, or call +44 (0)1624 645000 to speak to our client services team.

If you would like to find out more about how we can help you with retirement planning or more general wealth planning support, please contact us on the same number as above, or complete the contact us form using the link below.

Any examples of investments and structures used are for illustrative purposes only. The inclusion does not constitute an invitation or inducement to buy any financial investment or service. None of the content constitutes advice or a personal recommendation. Individuals should seek professional advice, based on their jurisdiction and personal circumstances, before making any financial decision.

Simon Prescott

Simon heads up the wealth planning division for the international business. He works with clients and their families, in tandem with their professional advisers, to help structure their investments and other financial assets to achieve their goals and aspirations through the development of bespoke wealth plans. Working in partnership with our teams of private bankers, he integrates the benefits of wealth planning alongside our broader wealth management and wealth structuring capabilities.

Simon has over 24 years’ experience of delivering investment and planning advice, 15 of which have been with Nedbank Private Wealth. His appointment followed the establishment of bank’s wealth planning function, where he was instrumental in its design, build and implementation.

Simon holds the Level 7 Diploma in Advanced Financial Planning, the highest financial planning qualification in the UK, and is a Certified Financial Planner^TM, a Chartered Wealth Manager and a Chartered Fellow of the Chartered Institute for Securities & Investment.

A tale of two coronations: 1953 and 2023

As we celebrate the coronation of King Charles III, we look back at the late Queen’s coronation in 1953 and how Britain has changed over the last 70 years.

The morning of 6 May 2023 will see the coronation of King Charles III at Westminster Abbey in London – almost 70 years after his mother was crowned in the Abbey on 2 June 1953.

Inevitably, comparisons between this year’s coronation and the Queen’s in 1953 will be rife. It’s already been announced that the service will be markedly shorter than his mother’s and the procession will be half the length, but it will certainly not lack pageantry and colour.

Back in 1953 the Queen’s coronation was the first ever to be televised. Fewer than two million British homes owned a TV at the time and the Queen’s coronation played a major part in making television mainstream. Over half the UK population crowded into the homes of family and friends with a television to watch the event in black and white. A black and white TV with a massive nine-inch screen would set you back around £45 – more than £1,000 in today’s money. Today, many British households have a TV in almost every room and along with phones, laptops and tablets, there will be no shortage of ways to watch the King’s coronation on 6 May.

So, what was Britain like 70 years ago?

In 1953, Britain was a major economic power but just emerging from the grip of post-war austerity. World War II had ended in 1945, but people were still living with the effects of the conflict. Many of its major cities were bombsites, staple foodstuffs were still rationed, it was almost impossible for many families to borrow money and there was a desperate shortage of affordable housing.

The start of the 1950s also saw high inflation of over 10%, which was attributed to a boom in world commodity prices as a result of the Korean War. So there are some surprising parallels with our cost of living crisis today. However, the end of the Korean conflict in July 1953 ushered in a period of low inflation and stable commodity prices that lasted until the 1970s. So Britain in 1953 was on the up with growth of 4% (up from 0.3% in 1952) and inflation down to 3%.

Interest rates

At the time of the Queen’s coronation, interest rates were down to around 3.5% according to the Bank of England, having fallen from 4.0% the previous year. In the 1950s it was the government of the day that controlled monetary policy. The responsibility for rate setting was only handed over to the independent Bank of England in 1997 by Gordon Brown, then Chancellor of the Exchequer. The current UK interest rate is rising and stands at 4.25%, its highest in 15 years, following 11 hikes since 2021. The Bank of England is expected to raise rates again in its next Monetary Policy Committee meeting on 11 May, as it attempts to rein in our current stubbornly high inflation.

House prices

Britain is known as a nation of homeowners and house prices are a favourite topic of conversation. The ending of austerity during 1953 saw extensive local authority driven housebuilding, as the UK built council houses to deal with the post-war shortage. Home-ownership rates were quite low, around 31% in 1953, but they grew rapidly as rising incomes enabled more to buy. Home ownership peaked in 2003 with around 70% of homes privately owned but has since fallen back to around 64% today as the price of housing has risen faster than incomes – making the dream of owning a home unattainable for many. According to historic data from the Nationwide Building Society, a typical UK property cost £1,891 in 1953, but the average house price had risen to £258,115 by March 2023.

Earnings

In the 1950s the UK economy was growing, with wages increasing and low unemployment. In 1953 average weekly earnings were around £7, but this masked a stark difference between the earnings of men and women. While men were paid on average £9 a week, women earned only £5 – a staggering gender pay gap of 80%. According to the Office of National Statistics, average weekly earnings today stand at £638 and while a gender pay gap remains, it is now down to 9.4%.

Stocks and shares

The world of investing was very different in 1953. As major industries had been nationalised, the stock market was light on transport stocks and utilities, while financials, materials and consumer staples were more dominant. The market also had a much more domestic focus than the global markets we know today. The FT30 index – one of the oldest indices in the world – was devised in 1935 and made up of 30 of the largest British companies, many of which are still around today although now part of large multinational groups. These included Imperial Chemical Industries (now part of Akzo Nobel), Distillers (now Diageo) and Imperial Tobacco (now Imperial Brands).

The FTSE100 index we know today was not founded until 1984. These days heavy industry has given way to other sectors such as consumer staples, financials, energy, healthcare, and materials which now dominate the modern indices. These changes reflect Britain’s significant shift to a services sector economy, with new jobs in finance, retail, tourism and hospitality sectors. In 1950, the Bank of England reported that manufacturing accounted for 33% of Britain’s gross domestic product (GDP), but by the end of 2022 this had fallen to less than 10%. Meanwhile the services sector now accounts for around 80% of Britain’s total output.

It’s fascinating to look back on the impact of geopolitical events and how the UK economy has evolved over the last 70 years. It highlights the powerful cyclical changes in the economy and, as we face our current economic headwinds, offers a reassuring reminder that all crises eventually pass.

If you would like to find out more about how we can help you with wealth planning support, or specific support when planning your retirement, as well as for other major life events, please contact us on the same number as above, or complete the contact us form using the link below.

We do not offer legal advice. We would always recommend you seek professional legal advice in relation to your will and lasting powers of attorney. We are, however, happy to work with your legal team, or to provide an introduction to a suitable lawyer should you wish.

This is not just lending. This is bespoke lending.

For high-net-worth clients with more complex borrowing needs, Chiraag Patel explains how private banks can offer a more tailored lending solution.

The fallout following the UK government’s infamous and unfunded mini-budget in September 2022 revealed the complex mechanics underpinning mortgage lending. The market turmoil that ensued saw banks and building societies scramble to withdraw mortgage offers as sterling plummeted to historic lows and gilt yields soared.

Gilt yields are important as they reflect the cost of government borrowing and are used by lenders to set mortgage interest rates. The rapid rise in gilt yields following the chancellor’s fiscal announcement meant lenders were faced with mortgage offers and products that were no longer viable. The events of September 2022 were extreme, resulting in the political downfall of a chancellor and prime minister, but they highlighted the complexities of mortgage lending and the potential difficulties in finding a product that suits your needs.

This is where a private bank, such as Nedbank Private Wealth, can often help. We have the flexibility to offer lending solutions that can be tailored to your individual circumstances, not just how well you fit a prescribed set of criteria. The benefits we offer can include:

A personal approach

Access to a dedicated private banker means a deeper understanding of your financial situation and goals.
Each lending application is judged on its individual merits.
Consideration is given to your wealth as a whole, rather than purely income.

Flexibility

Experience of working with those who may not fit the criteria of many high street lenders, such as those who have less traditional income streams.
Rates decided on an individual basis depending on the size of the loan relative to the value of the property, and the loan term.
For clients who are asset-rich but cash-poor, borrowing can be secured against a range of investments as well as UK property.

Expertise

Experience in providing lending solutions to clients around the world, often with complex financial affairs.
International expertise that can help expat and foreign national clients who are choosing to move to or invest in the UK.
Options for wider wealth planning opportunities alongside your lending arrangements.

Quick decision making

The autonomy to make quick decisions, allowing you to move quickly.
By taking a charge on existing assets to free-up cash, you can secure your new asset at the right price and remortgaging can be arranged at a later point.

Competitive pricing

Competitive interest rates and fee structures that can meet your immediate needs as well as supporting your longer-term wealth goals.
Cost effective, as your investments need only be transferred to us if the loan is secured against them.

Ultimately, we have the time and experience to understand you as an individual, which means we can provide a bespoke lending solution that will meet your financial needs in the most appropriate way.

Whether you are about to borrow for a specific purpose in the near future or are planning for something further down the line, it pays to discuss your needs in advance. Get in touch today and we can discuss your options.

Clients can borrow against a UK, Isle of Man or Channel Island-based residence, be it a home or an investment property. We also lend against investment portfolios, and loans can be denominated in sterling, euros or US dollars. With clients in 160 countries, we often help clients based outside the UK, and have lent using the same approach across market cycles since 1987.

To find out more about Nedbank Private Wealth’s bespoke lending services, please visit our ‘Borrowing’ page or email [email protected]. You can also contact your private banker directly or call our client services team on +44 (0)1624 645000. Or you can get in touch using the links to the forms towards the end of this page.

If you fail to keep up loan repayments, your home or property used to secure the loan may be repossessed. Any examples of products and services are for illustrative purposes only and do not constitute an invitation inducement, advice or a personal recommendation. Nedbank Private Wealth does not provide tax advice, and instead works with tax advisers to ensure clients receive the appropriate advice. Individuals should seek professional advice, based on their jurisdiction and personal circumstances, before making any financial decision.

Chiraag Patel

Chiraag joined the team in 2021 with responsibility for Nedbank Private Wealth’s lending proposition in the UK. His primary role is to support clients’ borrowing requirements, as well as help clients who have been introduced by mortgage brokers and other property intermediaries.

With 18 years’ experience as an adviser in the property teams of financial services firms, with an emphasis on serving the high net worth market, Chiraag’s previous roles include time as a credit specialist at Santander Private Banking and Barclays.

He holds a Certificate in Mortgage Advice and Practice (CeMAP) and graduated from the Queen Mary University of London with a BSc (Hons).

Is cash really a solution for your long-term goals?

As we look towards another year of inflation and market turmoil, rising interest rates and the predictability of returns from cash in the bank may appeal. But is cash really a solution for your long-term goals?

If you follow economic news or data closely, recent headlines might well have made you want to run as far as possible from investment markets. You’ll no doubt have witnessed conflicting economic data and been concerned about the impact of rising interest rates and, most recently, turmoil in the banking sector. If you’re already invested, you may have been tempted to pull the plug and move into cash. If you aren’t invested but were planning to, it may seem wise to delay.

In the following article, we answer some of the tough questions that may be going through your mind.

Are we heading towards another global financial crisis?

In our opinion, no. The recent banking upheaval is not the same scenario as 2008 because:

Banks have more capital and are now better regulated – especially large systemically important banks.
Regulators are more aware of the importance of acting fast to maintain confidence and avoid panic selling and withdrawals.As seen in their timely response to the recent issues at Silicon Valley Bank and Credit Suisse.
There are no widespread credit issues as there were in the 2008 crisis, which stemmed from a housing market crash in the US. The unrealised losses we’ve seen in some banks at the moment are due to higher interest rates and the effect these can have on government bonds. As long as banks have access to liquidity and they can borrow against these bonds, there should not be the material losses we saw in 2008 with mortgage-related debt.

Having said this, investor sentiment is something to watch out for. If investors start panic selling, this could lead to further market sell offs. But if you’re anything like me, you may well see this as a buying opportunity.

So what is the outlook now?

In our view markets will continue to be buffered by headwinds over the next 12 months, but there will be tailwinds too, which don’t tend to feature in the news headlines.

Market volatility is likely to remain elevated and economic growth is expected to slow. We anticipate this will be particularly pronounced in developed economies, but especially in Europe where energy restrictions impact output, high inflation reduces real wages, and tightening monetary policy slows aggregate demand. While still low, the risk of significant global disruption from the Russia-Ukraine crisis remains real.

Inflation will peak but remain high. Improving energy and food prices should help headline inflation fall, however, the relatively tight labour markets and higher wage increases may mean core inflation (which excludes energy and food) remains relatively high. The supply and demand issues that have beset markets since the pandemic and the start of the Ukraine war are expected to ease. Labour markets are also likely to settle, with unemployment to rise albeit slowly.

Central bank policy rates are expected to peak in 2023, but with tight labour markets risking second-round effects from higher wage increases, they are likely to remain higher for longer than initially anticipated. However, it is important to note that a significant number of interest rate hikes are already priced into bond markets. And we expect markets will start pricing in future rate cuts towards the end of 2023 and into 2024 as inflation and growth slow.

With cash now paying meaningful returns, would it not be better to invest in cash?

Although cash rates are currently high, it is unlikely they’ll remain so over the long term. Our current expectation, which is in line with many market participants, is that cash will average 3.5% a year over the next five years. This might sound high after years of ultra-low interest rates, but will this level of return be sufficient to meet your financial goals and outpace inflation? The answer to that question is particular to you but in most cases, cash is not a suitable vehicle for a large proportion of your wealth. In addition, if interest rates remain below inflation, your cash investment will be losing value over time.

If you’re already invested, markets are broadly down so you would need to sell your assets at a discount to move into cash. You probably wouldn’t choose to sell your house in a housing downturn unless you really needed to. The same applies to market investing.

If you’re not invested, from a buyer’s standpoint many markets are attractively priced (with some notable exceptions) so you could forgo the opportunity to buy into the market at a discount. Think back to the Covid downturn – wouldn’t we all want to buy equities at those prices?

The current uncertainty in markets may be a distraction, but if your investment time frames are over three years it should not be a deterrent. Volatility is a normal part of investing and trying to time the markets is pretty much impossible. Best trading days typically follow the worst – you blink, you’ve missed it.

Am I taking a big risk by investing now?

It depends on what you define as risk. If you mean volatility then yes, you should be prepared for a bumpy ride. But if you mean “do I run the risk of losing all or a great proportion of my money?” then no. Or at least not with our portfolios. All of our client portfolios are hugely diversified. We hold thousands of positions across different sectors, styles and markets.

In addition, it is our job to tread the fine line between reducing volatility and maximising opportunity. We have been cautiously positioned for some time in the expectation that the rising central bank interest rates will result in slower economic activity, which in turn will create a more challenging environment, so our investment portfolios are well positioned for this.

Ultimately, when weighing up cash against markets, it is the opportunity cost you should consider and how this plays out with your wider financial goals. The right decision for you requires professional advice and our team of wealth planners can provide you with a bespoke plan to help you achieve those goals.

If you would like to find out more about how we can help you with wealth planning support, please contact us on the same number as above, or complete the contact us form using the link below.

Investment values can go down, as well as up, to the extent that you might get back less than you originally invested. The value of your investments may also be affected by exchange rates. The inclusion of any investment structures and wrappers is for information only and should not be taken as advice or a recommendation. You should seek the necessary advice, specific to your circumstances, before making any financial decision.