In order to rebalance the economy following the financial crisis, he explained to Portfolio Adviser last week, it was necessary to reallocate wealth from savers to borrowers. And, in order to do this, central banks from the world’s developed markets have engaged not only in an unparalleled bout of money printing, but also have suppressed interest rates.
One of the consequences of this has been a significant decline in returns on cash. As Doran points out: “Since the declaration of hostilities in March 2009, the rate of return on cash deposits has amounted to just 3%, during which time the cost of living (measured by RPI) has risen by 22%,”
And, if the UK’s latest consumer inflation print is any guide, and it should be, this ‘rebalancing is set to continue into its sixth year, as interest rates are now unlikely to rise until February at the earliest.
From both a wealth manager and an investor point of view, there are things to be concerned about.
Firstly, for investment managers, despite this loss of purchasing power, cash on deposit remains a significant portion of many portfolios. Indeed, according to Blackrock’s 2013 Investor Pulse survey, which surveyed over 17,000 people across 12 countries, including 2000 in the UK, 68% of portfolios in the UK are in cash.
For Jeremy Roberts, head of UK retail sales at Blackrock, this level of cash on hand is one of the biggest problems facing the industry at the moment.
Roberts added: “Advisers tell us that they are trying to encourage their clients into equities but it is our job as an industry to educate the end customer not only about the effects of inflation but also that in a world where interest rates are low, the notion of ‘cash is king’ is flawed.
Jasper Berens, head of UK retail at JP Morgan Asset Management is also concerned about the level of cash on deposit, saying he still doesn’t understand why people have so much money on deposit at such low rates.
“We are now into our 6th year of low rates. I just don’t understand how people have been able to survive off that and why they are not taking more of that money out of deposit and putting it into investments,” he told Portfolio Adviser.
“There is a very large chunk in the middle of society that doesn’t get that they should be saving a great deal more than they are because it is a very long time between retirement and death and they have to have enough money to protect themselves from that.”
Getting people to invest more into risk assets is by no means an easy feat, especially when on the one hand valuations within equity and fixed income markets remain fairly high and, on the other, inflation remains relatively benign and so the impetus of visibly reduced short-term buying power is not really there.
But, there may well be another factor of which investors need to take account – the potential for unexpected inflation.
As mentioned, CPI in the UK is currently at a five-year low but, according to Doran, this could change. Inflation is caught up in the asset class markets at the moment, but it is going to seep out into real world inflation, he explains, “For example, do you know there is currently a shortage of bricks in the UK, he says.
“The banking system is the transmission system for that [the conversion of money printing into inflation], entrepreneurs are the transmission mechanism for that and entrepreneurs are in very good health at the moment and the banking system is all but fixed.”
Doran thus, is of the view that the most important thing one can do now is protect yourself from “unexpected inflation”.
And, he adds, the place to do that is real assets, assets where the cash-flows generated can adjust for inflation and in the context he says, equities are the best place to be.
“They might look expensive, but that is where you are going to best protect yourself from inflation, he says.
Which leaves us where we started. Clearly cash on deposit isn’t doing much of anything, but with asset markets where they are, a tactical cash position might make a lot of sense. But, if we do see a jump in inflation then it might rapidly prove a difficult place to be.
