For a better return on your cash, head east

Are you being robbed? If you have cash, the answer is probably yes. With the retail price index (RPI) running at 5.3% and the Bank of England base rate still at 0.5%, the value of your cash in the bank is, as Tim Price of PFP Wealth Management puts it, “being preserved at a rate of minus 4.8% per annum, give or take”.

If these circumstances continue, the purchasing power of every pound you have will have halved in around 14 years’ time. So much for the suggestion on the Bank’s website that it “sets interest rates to keep inflation low to preserve the value of your money”.

Instead, the deputy governor for monetary policy, Charlie Bean, said in Belfast recently that the MPC’s “chosen approach” has been to accept “a temporary period of above-target inflation” as the price of preventing a double-dip recession.

The maddening thing, of course, is that there isn’t much you can do about this without taking major risks. Obviously, if you haven’t already done so, you should buy the NS&I inflation-linked certificates (which will pay you RPI plus 0.5% tax-free for five years). But there is a limit of £15,000 per application so it isn’t a route that will protect most pensions.

It is also reassuring to hold some gold. Anyone feeling tense about gold prices in the wake of the recent volatility might like to read the story of Mr Martin Sulzbacher, a banker who hid a cache of 80 gold coins in his back garden in the 1940s. He never dug them up, but a local resident in Hackney recently did. They have now been returned to his son. Value? £100,000.

Sebastian Lyon of Troy Asset Management, who pointed out this story (from the Hackney Citizen) to me, notes “no paper money could have preserved wealth better over 70 years”. Lyon also points out that, with only around 0.6% of financial assets in gold (against 3% in 1980), it is hard to make a good case for gold being in a bubble yet.

But you can’t have nothing but gold. You also probably don’t want to be exposed to any other markets right now. With several emerging markets beginning to tighten monetary policy to deal with inflation, and the second round of quantitative easing coming to an end, it might be, as GMO’s Jeremy Grantham puts it, “time to lighten up on risk”.

Given all this, I’d still want to be holding some cash regardless of how robbed I might feel in doing so. Let’s not forget that all investment decisions are relative. Your money has to be somewhere and at the moment the risks of holding cash might be lower than the risks of holding too much in other assets.

The question I am asked most is what people should do with the money they are holding to pay for a house at some point. My answer – stick it in a savings account – always disappoints. But if you’ve gone to all the trouble of saving up a deposit, risking it in any market isn’t a good idea.

That said, just because you hold cash doesn’t mean you have to hold it all in sterling (although if you are saving for a house in the UK, you probably should). Last week, I met Liaquat Ahamed, one-time currency trader and author of Pulitzer prize-winning Lords of Finance: The Bankers who Broke the World. He said that, generally, as a country shows rising productivity and good growth, so it’s currency appreciates.

 

You aren’t getting much of either in the UK (you get inflation, low interest rates and a terrifying level of sovereign debt instead). So, if it is cash you want, you might as well hold Asian currencies. There are more complicated ways of explaining the attractions of the currencies of low-debt, high-growth nations but this pretty much sums it up.

Sadly, investing in groups of foreign currencies (you want the Singapore dollar and the renminbi at least) isn’t easy for UK retail investors. Commodity guru Jim Rogers tells me he just opens cash accounts wherever he is in Asia. But the rest of us don’t get around as much as he does.

You could buy State Street’s Wealthy Nation’s Bond Fund, which will give you good currency exposure. Otherwise, my colleague Cris Sholto Heaton suggests the Aberdeen Global Asian Local Currency Short Duration Bond Fund as being the closest thing he can find to a currency basket.

CLSA’s Russell Napier has another idea. If the pound is going to weaken and all Asian currencies to strengthen, he says you need to think about what the holders of those currencies are likely to spend their money on. One of them will be tourism. So if you want to make a geared play – in the West – on, say, the growing foreign purchasing power of the Chinese, your best bet would be to buy yourself a hotel in Hawaii or a smart guest house in Edinburgh – and then hang on to it for a decade.

• This article was first published in the Financial Times