Katharine Wooller, Managing Director, Dacxi, UK and Ireland
Last week it was reported that the Bank England is engaging with the regulator on bombshell negative Bank Rates for Q4 2020. The current base rate, of 0.1%, is the lowest in the BoE’s three centuries of existing, is not providing the jump start for the UK economy that it so desperately needs. Indeed, it will be the first time in our nation’s history that we have seen negative interest rates – monstrous news for savers and the banks’ profit margin alike.
Traditionally seen as a short-term fix for an ailing economy, there are now a number of countries using this fiscal stimulus as a longer-term economic tool with Japan, Sweden, Denmark and Switzerland utilising the method. Globally, in practise, we have already arrived at this destination, with about $16 trillion worth of the global debt market in negative yields, meaning some investors are so pessimistic about the short-term outlook, they’re willing to pay to hold bonds. Is this the end of traditional asset management as we know it?
The BoE is struggling to meet the government’s inflation goal of 2%, and with the bank rate at a historic low of 0.1% there is little wiggle room. Indeed, the inflation stats released in August, were not only underwhelming, they are a sleight of hand.
The CPI takes into account a plethora of good and services that the majority of the population are not currently enjoying in any great quantity – new clothes, eating out, fuel, and airfares. The 0.2% reported inflation, does not, therefore, accurately reflect the average person’s feelings about how far the cash in their pocket is going.
Coupled with the forthcoming end to the furlough scheme, I expect to see veritable tsunami of unemployment on the horizon. In dark times, understandably, enthusiasm for traditional assets classes is waning.
Interestingly, this perfect storm may be the tipping point for adoption of crypto for retail and institutional investors alike. The FCA released a research note over the summer that the proportion of the UK population purchasing crypto has doubled in the last year.
The institutional investors, who have long snubbed the asset are now coming to the table – a survey published by Fidelity found that more than one-third of institutional investors globally are exposed to crypto assets in some form. My favourite post COVID volte-face was Goldman Sachs, whose client call in late May declared crypto “not an asset class”, but by early August announced that it had hired a new global had of Digital asset and was reported to be considering its own ‘stable coin’. The sound of back peddling can be deafening!
As the world scrabbles to hedge against inflation and poor returns, reputable cryptocurrencies increasingly look like an obvious solution. Gold has performed particularly well this year, and soon those sitting on large quantities of cash are going to run out of safe havens. Bitcoin presents itself as a store of value, and the argument that it is a better, cheaper, faster, version of digital gold gains increasing credibility. Proponents argue that just a few per cent of the world’s audience for gold switching to bitcoin will give rise to a 10-fold increase.
Ethereum, long Bitcoin’s poorer relative, also, looks increasingly attractive, and assuming that the transaction costs can be kept low provided a viable medium for smaller transactions.
It is no surprise that a number of asset managers and hedge funds, including Paul Tudor Jones, have come out in praise of crypto a hedge against inflation. The future economic environment is uncertain, and Covid has dramatically rewritten the rulebook. It could be argued that it is now evident that to get industry beating returns, investors are going to have to think outside the box.
