The Sunday Times - UK (2022-04-10)

The Sunday Times April 10, 2022 13

MONEY

Inflation fears prompt £2.4bn bond sell-off

We’re backing Britain... why it

could pay to show home bias

worse than the student carpetbaggers of a generation ago? The FCA has warned that consumers should be prepared to lose all of their money if they invest in digital currencies such as bitcoin. The arguments against crypto sound much the same as many other popular shares: their value is based on sentiment in the market, there are no fundamentals and no consumer protection. Some argue that you should not back it because it is hard to trace, so criminals use it to launder the proceeds of crime. Crypto enthusiasts always respond that cash has the same problem. So why are so many young people still determined to put their limited savings into cryptocurrencies if they could theo- retically lose it all? In a way, what they are doing is per-

house prices are still rising at record rates. Last month Nationwide reported that average prices had risen £33,000 in a year. Even if you assume that you need to come up with only a 10 per cent deposit, that is an extra £275 a month young savers have to find just to keep pace with the housing market. Is it any wonder, when faced with buying a property in a market where the average house deposit is nearly £54,000, that younger investors opt for a moonshot investment in cryptocurrency rather than a more conventional one that feels impossible? Why wouldn’t they bring the keeper into the opposition’s box? Younger investors are bound to be enticed by the riskier option when cer- tain cryptocurrencies have risen 500 per cent in the past 12 months. Bitcoin is up 3,604 per cent in five years.

It is not crazy for young people to invest

in crypto — it’s actually perfectly sane

Imogen Tew Modern Money

fectly logical. Confronted by inflated share values, house prices that continue to soar and savings rates that are ravaged by inflation, young investors have been forced to look for alternative ways to make their money work for them. They are having a natural response to the craziness of other asset prices. It is a high-stakes gamble, but one where they feel they have little to lose. Like finding a tenner and putting it on a horse or bringing your goalkeeper up for a corner in the dying seconds of a football match that you’re losing. Behind the desperation for good returns is the fact that the overarching goal of many young people — saving for a house deposit — is getting further and further out of reach. It takes first-time buyers eight years on average to build up their deposit, and UK

Burgeman from Brewin Dolphin, the wealth manager, picked Mercantile Investment Trust, up 40.8 per cent over five years and Liontrust Special Situations, up 43.4 per cent. Morgan highlighted Man GLG Undervalued Assets and JOHCM UK Equity Income funds, up 22.7 per cent and 24.6 per cent respectively over five years. Hollands said that Artemis UK Select and Temple Bar Trust, up 45.5 per cent and 14 per cent respectively over five years, could suit those looking for funds that buy cheap shares. TB Evenlode Income and Liontrust UK Growth seek faster-growing companies and are up 38.7 per cent and 31.9 per cent over five years. For exposure to medium and smaller companies, Hollands picked the AXA Framlington UK Mid Cap fund and the Henderson Smaller Companies trust. They have returned 35.3 per cent and 59.1 per cent over five years. Morgan likes the FTF Franklin UK Smaller Companies fund, up 62 per cent over five years.

For years many of us showed our home bias by investing in British businesses. The tech boom then led to a shift and we profited from favouring global funds with high exposure to American shares. Now everything could be coming full circle. Ten years ago there was twice as much cash invested in “all-companies funds”, which hold shares in all sizes of British stocks, than in global funds that invest in companies worldwide. By January 2022 there was almost exactly the same in both sectors, according to the Investment Association, the fund industry body. That is no surprise. Over five years the S&P 500 index of large US companies is up 89.3 per cent while the FTSE 100 of blue-chip UK firms has risen 3 per cent. The FTSE 250 index of medium-sized UK stocks is up 7.8 per cent. “For some time, the UK market was widely seen as a graveyard of old-fashioned companies — obsolete oil majors, polluting miners, staid banks and legacy

telecoms,” said Rob Morgan from Charles Stanley, a wealth manager. Over 12 months, however, the S&P 500 and FTSE 100 are up by the same amount, 9 per cent, and the FTSE 100 has risen 0.6 per cent against the S&P 500’s 7 per cent loss so far in 2022. This is because American stocks are seen as expensive while Britain is cheap and has powered ahead as the oil majors and miners thrive. Morgan said: “If inflation proves to be more than transitory, interest rates rise, supply chains become more

localised and globalisation recedes, the UK could sustain this outperformance.” UK stocks make up less than 5 per cent of global markets, as measured by the MSCI World index. Morgan said that this should be seen as a good starting point for investors and suggested a home bias for 15 per cent of your portfolio — or more if you aim to draw an income from your investments — “because the UK market contains lots of high-yielding opportunities”. Jason Hollands at the Bestinvest platform suggested putting 30-35 per cent in UK stocks to mitigate any currency risk. For those looking to jump on the UK bandwagon cheaply, a low-cost fund that tracks the shares of British stock markets could work. Morgan picked the iShares Core FTSE 100 exchange traded fund, which has a 0.09 per cent fee, while Hollands suggested Fidelity Index UK, at 0.06 per cent. Long-term investors might prefer medium and small companies because they tend to perform better. Rob

David Brenchley

0.6% FTSE 100 rise in

The S&P
500 has lost 7%

There has been so much talk about frozen thresholds that the chancellor has earned the nickname Mr Freeze. And while campaigners rally for income tax thresholds and personal allowances to increase, there is one less talked-about threshold that hasn’t changed since it was introduced in 2017 — the house-price ceiling for Lifetime Isas (Lisas). The government’s Lisa gives savers a 25 per cent boost provided that they use the cash towards a house deposit or retirement. If the money is withdrawn for any other reason, there is a 25 per cent penalty (which digs into some of the saver’s own money as well as the bonus). Sounds somewhat fair, but there is a ceiling. The money can be used to buy a house only if it is worth £450,000 or less. While this sounds like a lot, for first- time buyers hoping to get a place in or around London or the southeast, it really isn’t. It also penalises those who get on the property ladder later in life and need a bigger family home. When the Lisa was launched in 2017, houses cost an average of £218,642, according to the Office for National Statistics. In January the average price hit £273,762, a 25 per cent increase. The Lisa limit would be more like £563,000 today if it had increased in line with house prices. The Treasury should increase the limit or, better still, scrap it altogether. If it doesn’t, it risks penalising those who have done the right things.

Mr Freeze

should thaw

the Lisa

threshold

2.3m

People in the UK hold cryptocurrency

I

f you were at university in the mid- Nineties, there was a hot tip for making money quickly — just open a savings account with a building society. It was not that their accounts were suddenly paying huge rates of interest, but rather that you could cash in on the demu- tualisation boom. A colleague who was at university at the time recalled how everyone on campus suddenly signed up to Halifax and put in a bit of their student loan. If you held at least £100 at the end of 1996 you were given a minimum of 200 shares worth £1,469 when the society demutual- ised. Hurrah for carpetbagging. What none of these students realised at the time, of course, was that they were helping to kill off the building society sector. Few cared about whether Halifax or Abbey National, Northern Rock or Brad- ford & Bingley were mutuals or listed banks. It was the cash that mattered. A decade later many former building socie- ties had been run so disastrously that they ended up at the heart of the financial crisis. Most don’t exist any more. Race forward to today and what are young people interested in now? Crypto- currency. “I’m choosing between crypto or Tesla,” one friend said last week. He is a doctor and is deciding where to funnel the extra cash he will make when he moves up the job ladder next month. He already has a healthy stocks-and-shares portfolio, having made nearly 200 per cent on his Tesla shares over the past few years. “Tesla is probably going to have to come down a bit though, isn’t it? Maybe crypto is best,” he pondered. Another friend asked him which cryptocurrency he would choose. She has made about £2,000 from bitcoin over the past four years, selling some when prices were high and buying smaller amounts every so often. She has done far better than me; I bought about £480 of bitcoin in September and it’s now worth £440. About 2.3 million people in the UK now hold cryptocurrency, according to the City regulator, the Financial Conduct Authority (FCA). The average holding is about £300. About a third of crypto holders told the FCA that cryptocurrencies were “better than investments provided in the mainstream financial sector”. Are today’s young crypto investors any

These younger investors are not fools. Instead of trying to convince them to avoid such investments, we need to improve consumer protections in what is quickly becoming a mainstream market. Without proper regulation, the sharks can prey. Research from Lloyds Bank shows that victims under the age of 45 now account for 70 per cent of reported investment scams, primarily after being lured by fake ads on social media promot- ing cryptocurrency. The average loss was £8,585. Last month the Advertising Standards Authority told more than 50 cryptocurrency companies to review their ads to make sure they were not misleading. The deadline is the start of May. In January the government said it planned to strengthen the rules on crypto ads and bring promotions in line with other financial ads. This would go some way to helping the problem, but it is not expected to happen before next year. We need to speed up the process. Today’s crypto investors are behaving in a rational manner in the face of a market that is behaving irrationally. It’s time to give them some protection.

BUOYANT BITCOIN

Price of Bitcoin

$80k

0

20

40

60

2017 2018 2019 2020 2021 Source: CoinGecko

SOARING HOUSE PRICES

Price of average house

£280k

200

220

240

260

2017 2018 2019 2020 2021 Source: Nationwide

Investors withdrew about £2.4 billion from bond funds in February as fears grew over high inflation and rising interest rates. Bonds — government or company debt — tend to be unpopular during times of inflation and rising interest rates because the fixed return offered by the investment is unlikely to match the increase in the cost of living. They become less attractive as other rates in the market head skyward. The UK ten-year gilt is yielding about 1.7 per cent,

western sanctions and supply-chain disruption, will only become clear in the months ahead.” The bestselling investments were North American funds, which collectively had an inflow of £570 million as investors looked to buy the dip in the US market. Investors bought £322 million of global funds, which are heavily weighted towards US stocks. Investors shirked equities in general, however. A net £47 million was sold overall, and withdrawals from UK equity funds amounted to £989 million.

which is high compared with the past few years but still significantly lower than inflation, which is predicted to end up averaging 7.4 per cent this year. A net £2.5 billion was taken out of investment funds in February, according to the Investment Association, a trade body. This is more than double the £1.2 billion withdrawn from the market in January. “High inflation and growing economic uncertainty provided an uncomfortable backdrop for escalating tensions between Russia and Ukraine

throughout February,” said Chris Cummings from the Investment Association. “The full economic impact, including the long-term market impacts of

Imogen Tew

1.7% Yield on ten-year gilts. Inflation is forecast at 7.4%

The Sunday Times - UK (2022-04-10)

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