Isa investors abandon ‘cheap and hated’ UK stock market as savings rates soar

Victoria Scholar from Interactive Investor on long-term investing

This morning’s consumer price index showed that inflation stood firm at 8.7 percent in May, exactly the same as April’s shock figure. That will force the Bank of England to hike base rates for the 13th time in a row tomorrow, from today’s 4.5 percent to 4.75 percent or even five percent.

Bank rate is now on course to hit six percent this year which would push best buy savings rates towards seven percent. That kind of return would have been unthinkable just 18 months ago, and pension and Isa savers want a piece of the action.

Today’s best buy savings rates are already at a 15-year high of 5.7 percent and there’s plenty more to come.

This marks an incredible turnaround after more than a dozen years when cash paid next to nothing, while shares soared.

Today, it’s the UK stock market’s turn to struggle, with the benchmark FTSE 100 going nowhere for the last five years.

In February, financial website Bloomberg called the UK stock market “cheap and hated”, and little has changed since.

Today, the benchmark FTSE 100 trades at around 7,600. That is just 10 percent higher than its peak of 6,930 on Millennium Eve, December 31, 1999.

Long-term pension and Stocks and Shares Isa investors will still be comfortably ahead, thanks to the generous dividends FTSE 100 stocks pay.

Yet today’s average FTSE 100 yield of 3.75 percent a year looks less attractive than it did, as savings rates rocket beyond that.

Financial advisers tell me their clients are keen to dump their underperforming pension and Isa investment funds in favour of today’s best buy fixed rate bonds.

Rates on cash are climbing all the time, with challenger bank Ahli United Bank launching a one-year fixed-rate savings bond paying 5.7 percent on Monday, available through savings platform Raisin UK.

That’s currently the UK’s highest savings rate, with second-placed United Trust Bank paying 5.45 percent over one year.

RCI Money pays 5.55 per cent over three years, with Beehive Money paying 5.45 per cent. RCI jumped to the top of the five-year savings bond tables yesterday, by paying 5.55 percent a year for five years.

Savings expert Anna Bowes, founder of rate-tracking service Savings Champion, says it’s almost impossible to keep up with today’s fast-moving savings rates. “These are unprecedented times with challenger banks constantly leapfrogging each other to pay that little bit more.”

The UK stock market looks jaded but still has its defenders.

Selling shares and shifting the money into the cash may not be a wise idea, said Victoria Scholar, head of investment at Interactive Investor. “Remaining invested over the long-term tends to be the best option, rather than jumping in and out of the market.”

Timing the market tops and bottoms can be near impossible. “While savings rates are going up, they are still falling short of inflation, meaning returns are still negative in real terms,” Scholar added.

Selling shares when markets are in the doldrums is a poor strategy, as you get less money and miss out on any subsequent recovery.

The FTSE 100 is likely to bounce back once inflation and interest rates peak, and the economic outlook brightens, Scholar said.

We’re not there yet, though.

While the UK has struggled to cast off its cheap and hated tag, the US stock market is booming once again.

The S&P500 is now in a bull market after rising 20 percent since October.

The tech sector is flying again as investors race to buy tech stocks like Nvidia and Microsoft that should benefit from the artificial intelligence (AI) revolution.

Yet it’s also risky, because as I warned a few days ago, just six top tech stocks are driving the entire rally.

The rest of the S&P 500 may not be cheap, but arguably it deserves to be hated, too.

Once inflation falls US and UK stock markets could make up lost ground, said Chris Beauchamp, chief market analyst at online trading platform IG. “Until then, we can expect further volatility.”

It’s understandable why savers would abandon shares. Cash offers a risk-free return, while the stock market combines higher risks with lower returns, at least in the UK.

Today’s soaring interest rates mean equities have to work harder to prove their worth. Savers are right to be sceptical but investing goes in cycles and the stock market should still prove its worth in the longer run.

Investors may have to be patient, though.

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