Savers in the UK withdrew a record £2.3 billion (Dh11.6bn) from their bank accounts in February, with falling interest rates forcing investors to consider alternative products that offer better returns. This figure was the largest monthly withdrawal of funds from UK banks since the British Bankers Association (BBA) started to keep records 12 years ago. The previous record for monthly withdrawals had been £1.5bn.
In the space of eight months, the Bank of England, in its attempts to stimulate the national economy, has reduced its bank rate from 5 per cent annually to 0.5 per cent annually - the lowest level in 300 years. Savers have correspondingly seen the return on their money fall to almost zero and are desperate to find alternative homes for their cash. These withdrawals are also a worrying symptom of rising unemployment as people, losing their jobs, are using hard-earned savings to supplement family income.
There are encouraging signs, however, that housing sales are picking up, with cash buyers dipping their toes back into the property market. The Royal Institution of Chartered Surveyors, for example, has said that inquiries from new buyers have increased for the last three months in a row. Some fund managers in the UK are also reporting increased interest among savers moving back into equities and corporate bonds in search of higher returns. The same story appears to be panning out in the rest of Europe. In January, for example, the German fund industry experienced its best monthly inflow of cash for years, with a net total of ?8.5bn going into retail funds.
Peter De Proft, the director general of the European Fund and Asset Management Association, believes that the European fund industry will emerge from the crisis even stronger than before. He says that investors are looking for transparency, quality and liquidity - something that banks have failed to deliver in spectacular style over the last 12 months. Banks are going broke and getting bailed out, but the fund industry is still intact, having required no government handouts whatsoever.
Equity markets appear to be cheap at the moment, so now is a good time to start increasing your exposure, especially if you invest on a regular basis, because you will be averaging the price at which you buy stocks or funds over time. This phenomenon is called dollar-cost averaging, and it helps reduce short-term risk in your portfolio (However, most investors have seen their portfolios fall by 30 per cent to 40 per cent during the last 12 months and, understandably, are reluctant to jump back into equity markets.
So if you insist on keeping your money in cash, where can you put it to get a decent return? The website www.interest-rates.org.uk can help supply the answer to this question. Simply select the option "compare offshore bank rates", stipulate your currency and the amount you wish to invest, and the calculator will tell you which offshore bank is giving the best rate. For a deposit of £20,000, it suggests the Anglo-Irish Privilege 30-Day Notice Account where interest is paid at 4.4 per cent whereas most of its competitors are offering around, say, returns of 3 per cent annually. Anglo Irish also comes up trumps with US dollar deposits. It is offering 2.1 per cent annually for deposits in excess of US$5,000. This is twice as much as most of its competitors, but, interestingly, is less than the rates currently available in dirhams in local banks. Since the dirham is pegged to the US dollar, investing in that currency is the same as investing in the US currency. HSBC, for example, is offering 5.3 per cent annually with its online e-Saver account with no minimum deposit required. Even higher rates are available with the UAE's National Bond Corporation, which has recently announced profits on savings at 7.07 per cent for 2008. Account holders also have the chance of winning prizes of as much as Dh1 million.
If you want to hold your money in US dollars, these and other local institutions are definitely worth investigation, though you should be aware that all assets held in the UAE are subject to Sharia'a Law. In the event of death of an account holder, the assets will be frozen to assist with payments to creditors and the eventual distribution will be in accordance with Sharia'a Law - which may not mesh with your own wishes.
If you want even higher rates, you will have to go off the beaten track to a boutique company operating in a niche market. Australia is about as far away as you can get from the beaten track, but its financial institutions have been at the forefront in developing innovative products and supporting them with a world-class regulatory environment. LM Investments takes in deposits from private, mainly expatriate, investors and lends the money to Australian blue-chip companies seeking to buy commercial property, factories and warehousing to develop their business. Loans are made in Australian dollars, but through the purchase of forward foreign exchange contracts, LM Investment is able to offer deposit interest in 17 different currencies.
It offers high interest rates partly because, in these credit-restricted times, they can charge correspondingly high rates to their borrowers and because they share their own forecast profits with their saving customers. This opportunity will last as long as international banks are reluctant to resume lending to customers and, more importantly, to one another. LM has an excellent track record, a strong financial rating and, through a cautious approach to lending, a very low default rate on loans that international banks would die for. Interest rates on LM's Managed Performance Fund for a 12-month term are currently at 5.8 per cent to 8.5 per cent in US dollars, and 8.1 per cent to 10.8 per cent in British pounds, depending on the amount invested and the investment structure chosen. These rates are net of all charges and Australian withholding tax.
Bill Davey is a financial adviser at Mondial-Financial Partners Dubai. If you have any questions on this article or any other financial matter, contact him at davey@mondialdubai.com