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We are all living through a tumultuous period as the effects of the global pandemic really begin to have an impact. However one of those effects is not all that bad, people have been saving more money than they were before COVID. So the question now is, should we save or spend?
It is quite understandable people are reticent to spend or invest savings when their job security may remain uncertain, and the old adage of always ensuring a sufficient emergency fund in the bank still rings true. However if you are now sitting on a cash pile in excess of 6 months' normal spending, your money may be under-employed.
In order to prop up economies, governments throughout the world have been printing money to support companies and individuals alike. However that comes at a cost, and that is usually inflation. Already, we are seeing signs of price increases on common goods and services on a global basis.
For example in the UK, the current rate of inflation is 3.2% whereas cash interest rates lag far behind at only 0.1%. In other words, the value of people's cash is being eroded in real terms by 3.1% per year. To illustrate, had you put GBP1,000 in a savings account 10 years ago, its purchasing power today would only be GBP877. Over a similar period, if you had invested GBP1,000 in a relatively conservative portfolio, its value would be GBP1,400 today, even after accounting for inflation.
Most of us know that over the long-term, an investment in equity-based assets like a carefully selected basket of stocks and mutual funds is much more likely to make higher returns than cash, albeit that it comes with a risk premium.
The markets have raced ahead strongly since the panic of the initial COVID outbreak and many investors are worried about a looming correction in stock markets. It is not an unfounded concern which is why we might recommend a 'phased investment strategy' if an investor has excess cash to invest. This means gradually releasing your cash in smaller portions over 12 months or so to greatly reduce the risk of adverse market timing, and average out market prices.
So the advice would be, ensure you have an adequate emergency fund, perhaps pay down some debts which attract high interest, and invest the excess to beat inflation and make your money grow in real terms.
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As you probably know from your own experience making an international transfer at Japanese banks can be extremely painful and will typically involve you visiting the bank within your lunch hour, filling out an overly detailed form, paying 4,000 yen or more in transfer fees and worst of all, being given an unfavorable exchange rate to boot.
But thanks to fintech companies such as Wise and Revolut there are now cheaper and faster solutions which allow you to fund your overseas investment accounts with just a few clicks and no hidden fees.
Wise (formerly known as TransferWise) is a UK fintech company with a global outreach which has been providing its foreign exchange service in Japan since 2016. You might have already used their services. Revolut is another UK fintech company which launched its service in Japan in August 2020 and competes in the same space.
Wise and Revolut are using an innovative way to transfer money from one country to another. They do not move money cross-border. For example, if you wish to send JPY to your investment account in the Isle of Man, you transfer the funds locally to their account in Japan. Then they send an equivalent amount in your preferred currency from their Isle of Man bank account to your investment account provider. So, there are two domestic transfers but no international transfer.
Of course they charge a fee, but they can be significantly cheaper than those charged by traditional banks. In particular, when sending JPY to bank accounts denominated in a different currency, they use the mid-market exchange rate.
Please find below a few comparisons as at June 7th, 2021.
Amount received in USD for JPY 100,000
Revolut: USD 913.35
Wise: USD 906.40
Rakuten: USD 889.30
Shinsei: USD 885.76*
SMBC (Prestia): USD 873.61*
Amount received in USD for JPY 1,000,000
Revolut: USD 9.122.20
Wise: USD 9,073.75
Rakuten: USD 9,035.60
Shinsei: USD 9,020.56*
SMBC (Prestia): USD 9,020.27*
*Amount does not take into account additional bank transfer fees of 4,000 yen +/-.
Please note: Payments to/from Wise and Revolut accounts registered in Japan are capped at 1 million yen (or at an equivalent value in other currencies) per transaction due to local regulations. However, if you wish to send more you can simply split your transfers over a period of days. It is also possible to schedule payments.
So how does this work in practice when you want to fund your investment account either with a one-off lump sum or regular contributions? The flowchart below should explain…
With Wise and Revolut you can open an account and get it approved within 1-3 business days and once your account has been approved you can fund it via local bank transfers. No more frustrated lunch hours spent in a bank!
If you already have an investment account through AP Advisers you can more easily fund it by opening a Wise or Revolut account and set up one-off or regular payments. Simply send an email to firstname.lastname@example.org and we would be happy to discuss the best solution for you.
If you have yet to open an investment account, please contact us here for a free, no-obligation consultation.
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Our latest blog extracts a recent article by Michel Perera from Canaccord Genuity Wealth Management, a very popular asset manager among our clients. Here we can read Michel's insights into the prospect of global inflation and the implications this may have for your portfolio.
Markets have not been straightforward this year. On the surface, equity indices are positive; underneath, swan-like, there has been a lot of action with large differences in performance between growth sectors (healthcare, technology) and value sectors (energy, materials, financials). This has given the impression of massive drops in certain sectors and the word ‘tantrum’ has been revived from the 2013 ‘taper tantrum’ episode. In 2013, markets were concerned that the US Federal Reserve (Fed) would stop buying assets (mostly US Treasury bonds) from the market. As a result, the whole bond market repriced with a ricochet slump in equities. ‘Tantrum’ has therefore come to be associated with a market correction.
Why are markets concerned about inflation? Current market worries come against the backdrop of fears of surging inflation. But are these worries overdone?
Last year, at this time, the pandemic caused inflation to collapse all over the world, setting a very low comparison threshold for this year’s prices. Inflation is generally measured as the rate at which the prices of goods and services bought by households rise or fall over 12 months, hence the starting point matters enormously. Plus, as a result of lockdowns, partial re-openings and supply chain issues, many bottlenecks have emerged which will inevitably cause certain prices to rise. It doesn’t take much more than that for the market to expect soaring inflation - and hence the prospect of the Fed stemming it by raising interest rates.
What is the Fed’s outlook for interest rates and inflation?
While the Fed has steadfastly confirmed that it will not raise interest rates for years (2023 at the earliest), it has not ruled out tapering its asset purchases (at this stage, they think there is enough liquidity in markets and don’t necessarily want to add more), which is why a tantrum is feared. Given that government bond yields have soared this year, from 0.9% to nearly 1.7% for the US 10-year bond (and from 0.19% to 0.82% for the UK 10-year gilt), markets are concerned that the Fed reducing its purchases will mean yields soaring further - and a bigger correction in equities.
Even last week, Fed Chair, Jay Powell, re-stated that interest rates will be on hold for at least two years and that short-term spikes in inflation will be tolerated, as the Fed doesn’t believe that higher prices will stick for long. His explanations have been very clear but nevertheless are not believed by markets who persist in believing that a string of high inflation numbers will trigger higher interest rates much sooner than the Fed indicates.
The Fed’s inflation gauge - the Core PCE (Personal Consumption Expenditures) Price Index - has been consistently below the Fed’s target of 2% during the whole of the last economic cycle, with a couple of brief exceptions. Chair Powell has announced that, from now on, the inflation target will not be an absolute number but an average number over a long period. Given that Core PCE has lagged its 2% target for 12 years, the Fed is saying it would be willing to wait for a few years with inflation above the 2% target before stepping on the brakes. Once again, markets are unconvinced and look for signs that a spike in prices will cause an interest rate hike soon.
Is the Fed’s interest rate policy likely to be reversed?
It is inevitable that we will see some nosebleed inflation readings in the next few months, but unless they are sustained for the whole year at least, it is unrealistic to expect that the Fed’s interest rate policy will be reversed so soon after announcing it (the last Fed policy lasted 40 years). Will markets pay attention to what the Fed says and does, or will they keep expecting the worst? Eventually, markets will get the message, but there could be some moments of extreme concern caused by inflation tantrums.
What can investors do if there is a market correction due to inflation concerns?
Anyone underinvested may want to consider purchases of risk assets like equities. Why? Simply because we have never seen the current favourable alignment of planets in the investment world:
What if inflation does indeed take off?
Of course, investing is not just about having a view, but also about preparing for alternative scenarios. There are several ways to help protect an investment portfolio from rising inflation:
A bull market, where equities are rising and expected to continue rising, has often been said to ‘climb a wall of worry’, as many market participants fear something will go wrong. In this case, it seems that the market is already bent on anticipating tears at the end of a cycle which has only just begun. Markets don’t believe central banks when they say rates are not going to rise soon. Yet, historically, it has paid off to heed their words. ‘Don’t fight the Fed’ is the best-known Wall Street adage. Maybe we should listen more carefully.
By Michel Perera
Chief Investment Officer at Canaccord Genuity Wealth Management
Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.
The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.
This is not a recommendation to invest or disinvest in any of the companies, funds, themes or sectors mentioned. They are included for illustrative purposes only.
The information contained herein is based on materials and sources deemed to be reliable; however, Canaccord Genuity Wealth Management makes no representation or warranty, either express or implied, to the accuracy, completeness or reliability of this information. All stated opinions and estimates in this document are subject to change without notice and Canaccord Genuity Wealth Management is under no obligation to update the information.
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Despite the global pandemic and its catastrophic effects on economies worldwide, there seems to be no waning of appetite for stocks and risk-based assets globally. The major markets have delivered mainly positive returns in the year to date, in particular, the Japanese NIKKEI 225 Index has outshone its developed market counterparts as COVID-19 has been relatively well contained.
In other financial sectors, we have seen cryptocurrencies go through the roof with some citing it as the 'new gold', and institutions taking up big positions in the asset class. We have also seen significant investment inflows into ESG (environmental, social, governance) either via the stocks of companies who adopt the philosophy or directly into ESG-related funds.
US Tech stocks seem very frothy in their valuations, none more so than Tesla but investors keep buying into the company’s direction. Technology is here to stay and will forever evolve so for the long-term investor, this sector remains an attractive one despite some incredibly high valuations.
But surely we are soon due a big market correction?
Not necessarily. Interest rates are at historic lows and are likely to remain that way for the foreseeable future, despite the potential looming threat of inflation. Fiscal stimulus throughout the pandemic has been on unprecedented scales, with the US recently announcing another massive bout of support and investment in infrastructure. Corporate earnings are bouncing back strongly with greater optimism on the back of the vaccine that the pandemic is over, and individuals have greatly boosted their personal savings through lack of spending opportunities.
Reasons to be cheerful? Perhaps cautious optimism is more the phrase at this time. There are still headwinds out there and markets inevitably recalibrate from time to time but the long-term investor should probably not be too concerned.
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Interest rates in the developed world have remained very low or even negative, ever since the global financial crisis of 2008/2009 and investors have struggled to extract any kind of meaningful yield from the asset class known as cash.
This is particularly challenging for retired individuals who need income but understandably do not wish to take risks with their capital. The biggest problem is that cash interest rates are below inflation and in real terms, this means one’s capital is eroding in value. For example in the UK, interest rates have averaged under 0.5% p.a during the last 10 years, whereas inflation has averaged over 2% p.a. Nowhere near enough to preserve the real value of your capital.
Interest rates will only rise if economic growth accelerates on a sustained basis or inflation increases to such an extent that if left unchecked, it could threaten financial stability. Neither scenario is evident in many developed economies at this time.
So what are the alternatives?
If one seeks a yield greater than cash, some element of risk will need to be accepted. It’s the old risk v reward conundrum. Of course, cash is essential within a portfolio for short-term and emergency needs but once that nest egg is established, what can an individual invest in for greater returns?
Fixed Interest Securities:
Government bonds were traditionally an option for a potentially higher return than cash but within a ‘low-risk’ framework. However the current yield from developed country government debt has also fallen to the point that even these assets do not protect against inflation. Corporate and emerging market debt may offer higher yields but go hand in hand with a higher risk profile which may be too much for some.
Once cannot compare cash with stocks from a risk perspective but they offer the potential of a yield greater than cash over the long-term and history has proven that. However one must accept that stocks fall as well as rise in value, and dividends from them are not guaranteed.
Equities are one of the few asset classes which currently offer a yield above inflation. While many companies have cut or suspended dividends during the COVID-19 crisis, there is still potential for the share price to rise as well as the future prospect of healthy dividend payouts resuming. When the yield on cash and bonds falls when interest rates are low, the capital value of equities tend to out-perform. Looking ahead, we should see corporate profits and dividends recover more quickly than rising interest rates as we ease out of the COVID-19 pandemic.
If you are concerned that inflation is eating into the purchasing power of your cash reserve, then accepting some risk and investing excess cash in a sensibly diversified mix of equity-based investments like mutual funds, index funds and Exchange Traded Funds may solve your dilemma over the long-term.
If you are looking to earn an income from your investments, you might want to consider equities for at least part of your excess cash for the foreseeable future.
Contact us to find out how we can help you protect your capital against inflation.