The savings glut could give long-term problems
Amid the many threats to our financial system from the coronavirus pandemic, a glut in global savings has emerged as one of the deadliest.
Private investors and giant institutions alike have resorted to hoarding more cash as the pandemic has laid waste to thousands of businesses and livelihoods.
But that, as many cash-strapped households will testify, is only part of the picture. Rather, there has been a sharper polarisation between those forced to raid their hard-won savings in order to survive the widespread drop in income, and those whose spending has been curtailed by the pandemic and struggle to find a secure place for their savings as stock markets have yawned and savings interest rates have plunged.
The result has been a build-up of cash – and a marked reluctance to commit savings to volatile markets and when the future looks so uncertain.
The risk of a global savings glut, say Fidelity International fund managers Claudio Ferrarese and Timothy Foster, could further weigh on developed economies as they seek to recover from the coronavirus.
A global savings glut, also known as liquidity hoarding, or “dead money”, is a situation where desired saving exceeds desired investment.
More money flows to those with a higher propensity to save, which pushes savings rates up, so this additional income generated is not spent in the economy.
Household savings rates have soared, while corporates are also not investing. They have not been using debt to invest. This, they say, is a continuation of a trend towards “Japanification” – a term used to describe the fact that many of the challenges developed economies face today were already present in Japan 20 years ago.
Those challenges included weak growth rates, low rates of inflation, low bond yields, huge amounts of central bank support, and ballooning debt burdens. Given that Japan has taken so long to recover from this prolonged stagnation, this is a worrying parallel.
Evidence of a cash build-up here at home is starkly evident in the latest figures from HMRC on ISAS. The number of investors subscribing to stocks and shares ISAS in the 2018-19 tax year fell by 450,000 from 2017-18. Although the amount subscribed to adult ISAS in 2018-19 posted a £2.3 billion increase over the previous year to £67.5bn, this was driven by the rise in cash ISA subscriptions, which rose by £7.3bn. The amount subscribed to stocks and shares ISAS fell by £5.2bn against 2017-18.
Uncertainty around Brexit in 2018-19 may well have soured investor appetite for stocks and shares ISAS, combined with a tough quarter four for markets in 2018. What’s particularly notable in the figures are the differences in investor preferences between men and women. There were 11.4 million ISA subscriptions by women by the end of the 2017-18 tax year (latest gender data available) compared with 10.6 million for men. However, men have higher average balances than women (£27,643 versus £24,831).
Stocks and shares ISA subscriptions were greater among men (1.3 million) than women (1.025 million), but the reverse is true when it comes to cash ISA subscriptions (2.9 million for men versus 3.6 million for women).
Interactive Investor’s head of personal finance Moira O’neill, warned that this can have long-term repercussions “and does not bode well for the income potential of women. Peace of mind, not running out of money, and having enough money to leave to children are all top objectives which require a regular reappraisal of attitudes to risk – but the huge uncertainty created by Covid-19 has made us petrified of commitments beyond the shortest term.
Another by-product of the pandemic on savings markets has been a rise in investment fund consolidation, the increasing focus on size and liquidity of trusts, the importance of retail investment platforms
Four major groups have emerged as the dominant players in the UK wealth management market. Rathbones, Brewin Dolphin, Investec Wealth and Tilney-smith & Williamson now account for around £175bn of assets under management or about 18 per cent of the total assets in the UK wealth management industry.
Hand in hand with this has been a growing centralisation of investment decision-making and a requirement for increased size and liquidity in the funds they buy. Funds between £400 million and £1bn are considered to be at risk due to the creeping pressures of liquidity and regulation.
Some hail this as a plus for private investors: big institutions, goes the argument, are more sensible. But as finance guru David Stevenson reminds us, “maybe all those pension funds and sovereign wealth funds knew what they were doing when they invested in the Long-term Capital Management hedge fund that collapsed in 1998. Or what about those super clever risk parity trades which recently blew up? Or perhaps one can point to the most recent example of insanity involving our trusted UK private wealth managers.”
As they get ever larger, “their investment functions are being centralised in new silos run by lots of clever people who go on about asset allocation. The net result is that decision making gets taken away from the person you used to deal with and placed with someone in head office who is a ‘specialist’.” But many of the most interesting investments are smaller than £500m. “These super-duper new wealth managers”, Stevenson warns, “completely miss this market”.
“History teaches us that very deep, liquid trades offer few opportunities to beat the stock market and eventually become overpriced. That’s why small cap stocks (loved by private investors) have, in the past, consistently outperformed over the long term.”