Lowes Magazine Issue 121

INVESTMENT SPECIAL

Saving and investing in 2022

LOWES CONSULTANT JOHN WALTON looks at the potential savings and investment landscape in the year ahead and what we should bear in mind in terms of the financial decisions we make. Uncertainty has been the

Cash holdings Let’s start with an issue that we have seen increasing over the past couple of years, which is use of cash as an asset. When the markets fell dramatically in March 2020 as Covid took hold, it was understandable that investors took fright as they saw the value of their holdings drop – the FTSE fell around 30% in March 2020. This short-sharp drop, plus the economic uncertainties people have been facing, have caused some to hold money in cash rather than invest in the markets. In addition, there have been concerning reports of people withdrawing money from their pensions and holding it instead in deposit accounts, immediately impacting its capability to grow. The UK financial services regulator, the FCA, considers that 8.6 million consumers hold £10k or more of investable assets in cash. With the low level of interest rate return on cash accounts, people are not only depriving themselves of investment returns – generally markets have returned to around pre-pandemic levels in the intervening months – but the buying power of their money is being continually eroded through the effect of inflation. As the economy has recovered post the 2020-21 lockdowns, there has been a sharp rise in the cost of living. Currently, inflation has been predicted to average over 4% in the coming year; it has already reached 5.4% in December 2021. This has seen the Bank of England take action to dampen the effects of rising prices by increasing the interest ‘base rate’ from the historic low of 0.1% to 0.25%, with expectations it will increase rates further in 2022.

predominant word through 2020 and 2021 and with the Omicron variant of the Covid 19 virus now spreading around the inhabited world, it is likely to remain so in the year ahead. It affects not just human health but economies including monetary policy and, of course, investment markets, which are largely driven by sentiment. For the UK, the impact of the pandemic has been compounded by the final stages of Brexit and the effect on the domestic economy of leaving the EU. It seems strange to think that for four years up to 31 January 2020 Brexit had dominated the news streams only to be completely overshadowed by the omnipresent threat of Covid. The UK now has a debt mountain equivalent to our GDP, businesses failing as pandemic-induced restrictions have cut their customer supply, supply chain issues derived from the impact of Covid across the globe, and rising inflation. This, in brief, is the backdrop for 2022. So, what does it mean for us as individual investors? What might the investment landscape look like going forward and how should we respond to it?

Cash Savings in today’s money terms (4% inflation)

Investment Value (4.25% growth after charges)

Investment in today’s money terms (4% inflation)

Cash Savings Value (0.50% interest)

Year

0 1 2 3 4 5

10,000 10,050 10,100 10,151 10,202 10,253

10,000 9,663 9,338 9,024 8,720 8,427

10,000 10,425 10,868 11,330 11,811 12,313

10,000 10,024 10,048 10,072 10,097 10,121

Aegon analysis 2021, £10,000 at 4% inflation growth

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