BoE’s monetary magic isn’t working for investors – Psigma

Added 19th August 2016

The Bank of England’s efforts to soothe the post-Brexit economy are discouraging savers from spending and pushing them into riskier investments, warned Tom Becket, Psigma CIO.

BoE’s monetary magic isn’t working for investors – Psigma

Although Mark Carney’s stimulus package “undoubtedly surpassed markets’ expectations,” the predictable 0.25% rate cut will have a negligible effect on consumer habits, Becket argued.

In fact, Becket is of the opinion that “rate cuts below 1% start to have a limited or perhaps zero effect” on spending. 

“I would argue there is no evidence to suggest that rock bottom rates are providing a boost to the spending of debtors, who appear to have spent the post-crisis years repairing their personal balance sheets,” he said. “On the flip side, I actually believe we are in a situation where the destroying of savers’ ability to earn a “risk-free” return on their cash is impeding their willingness to spend.”

And Becket doesn’t rule out the possibility that UK interest rates could go lower or even negative if economic data disappoints in the coming months.

“Indeed, I would get really worried if Carney followed Kuroda and Draghi in the Limbo contest of “how low can you go” with interest rates and went into negative territory. Is it possible? I would rule nothing out.”

Becket also worries about the monetary policy shock waves rippling through the UK Gilt and corporate bond markets, pushing yields to new record lows.

“One by one, traditional asset classes are falling into realms of “un-investable” and investors and savers are being forced to take ever more risk just to achieve a return. Whilst this dynamic can keep markets buoyant and, probably, encourage further gains, it is a dangerous game for the Bank of England to encourage savers to play with their assets,” said Becket. 

And Becket anticipates this trend will add further stress on insurance companies and deepen the pensions crisis toward the end of the decade.

Security for savers

The BoE’s misreading of the banking sector’s dilemma as a liquidity problem does offer up a silver lining for savers by highlighting the attractiveness of bank bonds over bank equity, said Becket.

“The banks want to lend, but they want to lend people who don’t want to borrow,” he stated. “In addition, the government and central bank might want banks to lend, but, as the stress tests show, banks are being forced to hold penal amounts of capital and can’t make money. This makes me positive on bank bonds and sceptical of bank equity, despite some optically low valuations. Bank bonds look like a good place for savers to put their money given how little their bank accounts are paying them; maybe Mark Carney should just tell UK savers that directly.”

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