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Current Account Interest

Summary

Banks are keen to acquire customers from an early age by historically offering teenagers mouth-watering inducements such as protractors and other small pieces of school equipment. For once committed, people rarely change their bank accounts.

Banks are keen to acquire customers from an early age by historically offering teenagers mouth-watering inducements such as protractors and other small pieces of school equipment. For once committed, people rarely change their bank accounts.
Recently Santander and Halifax have attempted to change that by offering cashbacks, cash inducements and/or ‘high’ interest rates. By all accounts they have been successful in persuading hordes of people to switch including many who have been with the same provider for many years.  Halifax and Santander have also made switching easier by offering to take the administration burden off your hands too; sorting out your direct debits etc.  Whether this will breed long-term loyalty remains to be seen but the prospect of earning up to 3% on your current account when generating interest on many assets is challenging is not being sniffed at.
On the subject of current accounts, last week saw the latest data published on the UK’s current account balance.  The current account measures the UK’s balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).
2014 ended poorly for the UK’s current account data as a record deficit (since records began in 1948) in Q4 as a percentage of GDP was posted.  See below.
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The problem doesn’t lie in the trade account part of the current account as that at minus 2% of GDP while not desirable is manageable. The issue is the primary income or interest account, in other words we’re paying out considerably more interest than we’re receiving from our foreign holdings. This may be partly due to some of those holdings yielding less than those in the UK but if you add the current account deficit to budget deficit which has failed to come down as much as predicted, the resultant ‘twin deficit’ of over 10% of GDP will require some funding and the patience of overseas investors. If you consider that the UK twin deficit is in excess of Japan at 8%, the US at 5% and the Eurozone at around zero, sterling could come under pressure whoever wins the general election.
Our global equity fund is essentially a non-UK proposition and gives its holders diversification through its global equity exposures in such situations. Our multi-asset funds are broadly assembled to reflect opportunities across all asset classes. Consequently they contain currency diversification away from sterling but it is not intended to be the key driver of absolute returns.
For more information on the T. Bailey Growth and Dynamic Funds please contact Peter Askew, Elliot Farley or Kevin Payne on 0115 988 8200.

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