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Inflation: Why piggy banks won’t fly

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Summary

Global economic growth is good news for investors, but it brings inflation with it which can have consequences for savers.

2 min read

Prices are rising across the globe thanks to a growing world economy. Controlled inflation rises bring benefits but inflation is actually the stealth enemy of your wealth – especially if you’re sitting on cash.

Inflation accelerated in the US and Europe last week while remaining steady in the UK and Japan. A key point that came through for us was that the numbers underlined an ongoing shift in economic growth that started in the first quarter of this year.

Here’s what we learnt:

  • US growth remains strong but is de-coupling from the rest of the developed world where economic expansion is cooling to more normal levels
  • The European Central Bank announced that its bond buying programme would end in December as the region is now strong enough to operate without ongoing intervention
  • The Bank of Japan made no changes as it continues to assess the reasons for weaker growth
  • UK inflation stayed at 2.4%, with its downward trend halted by hikes in the cost of crude oil

Coutts Head of Investment Strategy Sven Balzer explains, “The US continues to soar, spurred on by President Donald Trump’s tax reforms, while the other developed regions of the world return to more normalised growth figures.

“The US is such a large and influential market its success is good for markets across the world. Partly thanks to the country’s current strength, we still see no sign of a recession that would herald a significant downturn for at least the rest of this year, possibly longer.”

“The US continues to soar, spurred on by President Donald Trump’s tax reforms, while the other developed regions of the world return to more normalised growth figures.”
Sven Balzer, Head of Investment Strategy

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Our position

We have positioned our portfolios and funds to benefit from the current economic landscape in a number of ways.

  • We increased our exposure to the FTSE 100 in April to take advantage of market falls as we believe UK shares are good value and will be supported by global economic growth
  • Our long-running preferred investment themes of technology and healthcare are US-centric and have benefited from the positive backdrop there – the MSCI World Technology Index has returned 14% so far this year in US dollar terms (as at 14 June, with income re-invested) and the equivalent healthcare index returned 3.2%, both ahead of the broader MSCI World Index’s return of 2.9%

As always, it is important to remember that past performance is not a reliable guide to future performance.
 

Beware the perils of inflation

All parts of the world that made announcements last week had something in common – in each case inflation remained above interest rates. While that’s good news for equity markets, it’s a harsh reminder of the very real risk inflation poses to your wealth.

Put simply, if your cash is tucked away in a deposit or savings account, its value isn’t keeping up with rising prices. And it’s worse if you like the finer things in life. As we point out in the Coutts Luxury Price Index, the cost of high-end goods and services is increasing at over double the speed of mainstream prices.

Meanwhile, we have a global economy that is slowing from the high speeds of last year but still in good shape.

While there are strong arguments for savings accounts – they are reliable, easy to access and risk free – investing could be a good option for securing the spending power of your money over the long term.

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

About Coutts Investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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