You’d Have to Outlaw Stocks Before Investors Settle for Term Deposits

Deciding where to invest money your money isn’t a tough choice these days. Outside of hard assets, like property, you’re left with two real options — stocks and cash. Choosing between these two is easier than it otherwise should be.

To date, ASX stocks have plunged 9% in 2015. Under any circumstance, that’s a disaster. But has its performance put you off shares? If you’re like most investors, probably not. Why? Because cash is still much worse off. What used to be a guarantee of stable, but solid returns is anything but. It now offers much weaker yields.

Compared to cash, the stock market provides ample opportunities for yields. The kind of returns you simply won’t find in term deposits.

Aussie investors are catching onto this. A new CommSec report into cash proves savers are abandoning term deposits in droves.

Bank issued term deposits fell 5.7% to $510 billion in the year to August. The amount of money held in term deposits has decreased for 21 months straight.

You can see why savers are turning their backs on cash.

Aussie interest rates are at a record low 2%. The Reserve Bank (RBA) lowered the cash rate by 0.50% this year already.

Because of this, fewer investors are rolling their term deposits once they mature. You can’t blame them. Investors still want yield. They’ll look for it where they can. And it’s not in cash.

But you’ll still find generous returns on the ASX, even in blue chip stocks. All the market volatility in the world doesn’t matter if you can get better returns chasing banking stocks…

Take a look at a comparison of the yields across stocks and cash.

You’ll find yields of up to 9.5% buying into banking stocks. A term deposit, however, comes with meek returns of 2.7%. That figure is well down on the 3.5% you’d find even three years ago.

So consider your options in the current low interest rate environment.

Investing in banks is better than leaving your money with them

You can earn three times as much buying into banking stocks than you would with regular term deposits. And that’s despite the hits the banking sector took this year.

Commonwealth Bank [ASX:CBA] is down by $13 a share since January to $73.25.

Banks have reported lower earnings, and flat profits. They’ve also raised up to $16 billion capital to August. CBA and ANZ [ASX:ANZ] accounted for half of this in the space of a single week in August! That’s more than the amount banks raised during the global financial crisis.

Just yesterday too, banks followed mining stocks by plunging more than 3.5% in value each. But you wouldn’t bet on yesterday’s rout shaking investor confidence either. Why?

Well, imagine that you lost half your money in CBA shares over the next five years. Guess what? You’d still be ahead compared to leaving your cash in a term deposit.

It’s not much of a decision, is it? And you don’t need to do much on your end. It’s a risk free options that invests in the most traditional sectors and companies.

Unfortunately for savers, things could get worse in the future.

Where Aussie interest rates are heading

The recent US Federal Reserve decision to keep rates on hold was a blow to Aussie savers. For no other reason than it raised the likelihood of further rate cuts in Australia.

How likely is it that we’ll see rate cuts again this year?

According to investment bank Citi, the number of bets placed on a third rate cut in 2015 are rising. Interest rate swap markets show a 76% chance of a 0.25% rate cut by November.

By June 2016, interest rates could hit as low as 1.5%. That’s won’t change your mind about leaving your cash in term deposits.

Either way, one thing is clear: low rates are staying with us.

Even if the Fed begins its anticipated rate ‘lift off’, it may be a while before the rest of the world starts hiking.

After all, central banks are relying on rising US rates to boost their economies. They’re not waiting so they can start lifting themselves. All of which makes the next few years tricky for cash investors.

People are saying they want good yields, which stocks still promise. Regardless of the risks the ASX poses at the moment, low rates have turned cash into a yield nightmare.

What will bring investors back to cash?

Choosing between stocks and cash won’t get any harder anytime soon. But what could prompt a rethink?

If CommSec is right, the ASX will need a major event to knock investors’ confidence. Something as drastic as the collapse of a big miner like Glencore [LON:GLEN]. That might drag investors back into cash, or so it believes.

But if the recent rout on markets wasn’t enough of a scare that might not be either. And I think this comes back to interest rates.

Interest rates are a boon to stock markets because they increase lending in the economy. As cash floods the system, it finds its way into high yield assets like stocks. Falling interest rates will do the work for the ASX, on two fronts.

On the one hand, it will continue drawing investors away from term deposits. At the same time, it will increase the amount of money diverting back into stock markets.

Mat Spasic,

Contributor, Markets and Money

PS: The RBA left rates at a record low of 2% in September. According to Markets and Money’s Phillip J. Anderson, interest rates could remain low for a long time. Which won’t come as much of a boost for savers…

Phil’s written a brand new report, ‘Why Interest Rates Could Stay Low for the 21st Century’. In it, he warns that you won’t be able to rely on your savings to fund your retirement. As Phil says, inflation, from low rates, is eating into your savings. You can’t rely on savings accounts or term deposits for your retirement. The regular return on a term deposit has halved in the last four years alone!

That’s why Phil wants to show you the best way to invest in this low interest rate environment. He’s prepared a four pronged strategy that’ll boost your wealth. You’ll learn where to park your cash over the coming decades to profit immeasurably. To download the report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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