Old rules of money apply again, says HAMISH MCRAE

Higher for longer. That is the message from the markets over the past week.

Strong employment growth in America, sticky inflation in Europe and even more so in the UK, will combine to force central banks to push interest rates up further worldwide – and probably hold them higher for a while too.

The markets didn’t like it. Bond yields are up, with the 10-year yield on US treasuries above 4 per cent, and our 10-year gilts close to 4.75 per cent. Yields on two-year and five-year gilts are higher still.

As for equities, the FTSE 100 index had its worst day this year on Thursday, and was off again on Friday. It has been an uncomfortable validation of the rule of ‘sell in May and go away’, though actually this year you would have done even better to sell in April.

The main reason for equity gloom is that the markets now reckon that the central banks are prepared to push the main economies into recession, if that is the price for getting inflation back to the target of 2 per cent.

Savvy saver: The old rules again apply – one is that we should try and make our savings work for us

Higher bond yields make them relatively more attractive vis-à-vis equities, and recessions (or even slower growth) are bad for company earnings.

It is not great news for mortgages either. If our Government has to pay nearly 5.5 per cent on two-year gilts, a two-year fix for a mortgage is going to cost over 6 per cent. You and I may think that the creditworthiness of a British home-buyer is just as good as that of His Majesty’s Government, but I am afraid that is not what markets reckon.

It was unfortunate timing, too, for the Centre for Policy Studies to publish Retail Therapy, a paper calling for more retail investors to put money into the stock market instead of leaving their cash on deposit. It is an important theme and a valid one, for on any long view, returns on equities have been higher than those on fixed-interest investments such as gilts, and much higher than on cash.

Over the past 50 years you would get a real return (allowing for inflation) of 4.9 per cent on UK equities, 3 per cent on gilts, and only 0.9 per cent on cash. Over the past 10 years, it would have been 4.7 per cent on equities, 1 per cent on gilts, and minus 2.5 per cent on cash. Yet only 12 per cent of UK shares are owned by retail investors, compared with 50 per cent in the 1960s. Instead, we have £1.8 trillion in savings accounts, almost as much at the market capitalisation of the FTSE 100.

At least we haven’t done as badly as the pension funds and other institutional investors, which have relentlessly sold their holdings over the past couple of decades, a scandal that we have drawn attention to in this newspaper and which the Government is trying to tackle – as we report below.

But despite the financial case for more retail investment, and despite the fact that UK shares are even better value now they have come off the top, encouraging people to invest more in equities will be a long slog.

There is an even wider issue here. We have to get over the message that the ultra-low interest rates of the past decade were unprecedented, and will probably never occur again in any of our lifetimes. It was an experiment by the central banks to boost the economies without leading to inflation, and it has failed.

We will now probably have a decade of interest rates that will be higher than inflation, maybe quite a lot higher, and we should prepare for that.

In practical terms, this means that the old rules again apply. One is that we should try and make our savings work for us.

The country as a whole is sitting on a huge pile of so-called excess savings, funds that were built up during the pandemic shutdowns because we could not spend them.

The best estimates put this at around £200 billion – huge. It is unevenly distributed, to be sure, with older and wealthier people having much more than the young, and some of the cash will be run down and spent. But meanwhile, it needs to be set to work.

Other rules include only borrowing to acquire real assets, including buying a home, rather than to finance current spending. They include, the point the Centre for Policy Studies makes, investing in equities for the long term.

Obviously, everyone should take advantage of the tax incentives for saving and pensions, and so on.

It may sound boring to call for common sense in managing personal finances, but this past bumpy week makes that message more important than ever.