Why should you consider investing your excess savings?

The world economy has recovered impressively quickly from the various blows of the last couple of years, particularly the UK. However, relative to pre-pandemic levels of activity, the UK economy is still a laggard relative to the other G7 countries. The return to whatever normal waits on the eventual other side of this pandemic is set to be particularly complicated for the UK.

Bedding in Brexit would have been sufficient challenge on its own. However, when added to the extra homework inflicted by the pandemic and a more problematic context for inflation, you can perhaps start to see why there are concerns about the short-term outlook for the UK economy more so than in some other countries.

What is the outlook for inflation?

What was expected to be a hump in inflationary pressure, fuelled by various pandemic-related distortions, continues to linger well beyond what most professional forecasters expected. We are seeing some of the supply chain snarl-ups ease, even as Omicron has reinserted a little chaos.

However, in the UK, we are seeing inflation expectations tick up over multiple time frames. History suggests this is a dangerous moment, where the inflation genie so long contained begins to seep out of the bottle. As workers understandably begin to demand extra compensation to help them combat soaring living costs, the spectre of prices and wages chasing each other higher draws a little closer.

What might the Bank of England do?

The Bank of England understandably see themselves as having little choice but to respond forcefully. After a false start towards the end of last year, interest rates have now been raised at back-to-back meetings for the first time since 2004. They are expected to continue rising briskly in the next few meetings at least until the middle of next year. Interestingly, market forecasters see this as too much for the economy to take, and expect the Bank of England to begin cutting base rates in 2024.

What does that mean for households?

Households have a tough few months to navigate. The cost of living crisis will hit the poorest households hardest. An impressive stock of savings has been gathered by households over the past couple of years as a result of restricted spending opportunities and government support since the beginning of 2020. Household gross savings value in the UK spiked during the second quarter of 2020, reaching a value of approximately £92bn.

By contrast, during the first quarter of 2020, gross savings amounted to £35bn. This unprecedented increase was due to the coronavirus outbreak and the resulting widespread lockdown and temporary business closures. A similar increase in savings can be seen during the second generalised lockdown in the first quarter of 2021¹. However, this war chest is unevenly distributed with most believed to be accounted for by the highest earning households.

In terms of the UK’s mortgage book, around 30% of UK households have a mortgage and mortgage debt represents around three-quarters of the overall stock of household debt. Obviously, the effect on households will depend on whether individuals are exposed to floating rate (a variable-rate mortgage where the interest rate periodically adjusts based on changes in the index which reflects the cost to the lender of borrowing on the credit markets) or fixed rate products and over what time frame. Around 20% of the stock of mortgages by value have a floating interest rate. The rest will not experience any change until their product period ends.

What can savers and investors do?

Recent months have witnessed a strong period of performance for the UK stock market. The energy and financials sectors in the UK’s FTSE 100 have benefited from the sharp rise in energy prices and the accompanying rise in interest rates. Note that past performance is not a guide to future performance. Despite the UK stock market’s recent strong performance, UK investors may like to avoid confining themselves to their domestic market. As ever, we recommend diversification across regions, sectors, and styles.

Source: Bloomberg, Barclays. Past performance is not a guide to future performance.

The choice between holding cash in a savings account and investing could have a big impact on your future. When you invest, you hope for greater returns than you can get from a savings account but you also have to accept that you could get back less than you put in. It is important to start by taking a close look at your finances and your commitments to work out where you are now, and where you want to get to.

Before you start investing it’s important to consider if you’ve paid off any debts like credit cards or loans, and if you have sufficient savings you can access in emergencies. The sooner you’re able to start investing, the longer your money has a chance to grow. You don’t need a big lump sum to get started – putting money away regularly can make a big difference in the long-term. If you’re not sure whether to save or invest, learn more about the differences between the two.

Where to invest

If you are looking for a long-term investment in an actively managed fund, you may like to consider the Barclays Funds List. We believe that the best way to achieve your long-term investment goals is to have a diversified portfolio. To help you we’ve created our Funds List – it’s made up of funds we like from the sectors we believe are key to building a diversified portfolio. Within each sector, there’s usually a mix of investment focus and investment approaches to choose from. So why not take a look at our selection? Find out more information on these funds.

If you’re ready to invest but are short on time or need some inspiration, you might want to consider one of our five Ready-made Investment funds (RMI). You don’t need to be an expert – our team of professionals create and monitor our funds. The RMI are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with.

These Barclays multi-asset funds invest in passive funds (a fund which tracks a market index, or a specific market segment, and usually has lower fees than the equivalent actively managed fund) across a range of asset classes and regions, offering a globally diversified solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.

Past performance of the fund and its manager are not a reliable indicator of their future performance.

We don’t offer personal investment advice so if you’re unsure you should seek that independently.

Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

Read the Assessment of Value report [PDF, 3.2MB] for funds run by Barclays.