Let us be realistic, the UK economy is facing at least three storms with COVID-19, Brexit, (even with a limited agreement) and of course potentially the US election. The first two factors are already having a direct impact on growth - the UK economy shrank by the most among Group of Seven nations in the second quarter - and are giving rise to mounting debt - the UK’s public debt has topped £2 trillion, surpassing 100% of gross domestic
The main rating agencies have already taken some actions in September and October with both Fitch & Moody’s agencies cutting UK rating to the negative AA level, (Fitch: AA with negative outlook & Moody’s AA3 stable outlook,) while only S&P has kept an AA rating with a stable outlook. This has also led to some key UK banks’ deposit ratings being cut from AA negative level to strong A, (A+, A1.)
The outlook for UK equities, depending on Brexit, is not positive with YTD performance substantially down coupled with a relatively high volatility, (VIX index,) while gilts, albeit with negative yield, (up to 10 years maturity,) remain a reasonable hedge against volatility.
With the recent announcement of NS&I slashing rates, government guaranteed savings products are less attractive and the ratings downgrades only adds to the relative attractiveness of higher rated banks' products in contrast.
In these times of uncertainty, it is key to diversify among different asset classes including cash. Cash can be deposited at different institutions, to minimize risk and create a financial buffer with reasonable ease of access. Although interest rates on savings accounts are lower than in early 2020, this is fully compensated for by low inflation with UK 12-month inflation at 0.7% in September 2020.
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