Crisis era has redefined Irish investors and cooled ‘animal spirits’
Economic uncertainty can influence saving behaviour and right now Brexit represents a key risk for the domestic economy. However, so far Brexit doesn’t seem to be driving stronger precautionary saving. In April 2018, only 4pc of Irish people were saving more as a direct result of Brexit, according to the Bank of Ireland/ESRI savings and investment index. Does this mean Irish savers don’t care about Brexit? No, rather it appears that savers are waiting to see how Brexit pans out but are readied to pick up the pace of saving.
Since October 2017, Bank of Ireland has collaborated with the ESRI to compile a savings and investment index which measures Irish sentiment towards saving and investment issues. One of the clearest findings so far has been that we are more of a nation of savers than investors. On average, around 70pc of people were doing some saving each month over the past year, compared to only 37pc who were investing. Savings patterns have improved significantly in recent years and the economy has been the catalyst of this. As Irish economic growth has strengthened and employment and wages have grown, saving has simply become more affordable.
Another surprising aspect of the savings dynamic has been how amounts on deposit (€103bn at the end of September 2018, according to the Central Bank) have swollen in spite of the low interest rate environment. Clearly some people will always be savers irrespective of the deposit returns on offer. For the more interest-rate sensitive saver however, the outlook is mixed. While interest rates may edge higher over the medium term, we believe deposit returns will remain low by historical standards. Consequently, savers who need to generate returns may have to invest their money to achieve their financial goals.
When it comes to investing, the global financial crisis was a watershed for Irish investors and investment managers. In its aftermath, we saw the investment industry design new ‘risk-managed’ funds to withstand more volatile market conditions. In addition, Irish investor risk appetites were clearly damaged by the crisis. This is apparent in the changing trends in investment flows since then. Nine years into the equity bull market, lower-risk funds remain the most popular choice for the average Irish investor. This marks a departure from previous market cycles as one would have expected animal spirits to be running much higher at this point. ‘Animal spirits’ was first used by economist John Maynard Keynes to describe the emotions that drive human behaviour. In previous market cycles, if we were nine years into a bull market, as we are now, I’d be expecting the average investor to be chasing the stock market or clamouring to buy into it. But we’re not seeing it this cycle.
Lower-risk funds have outperformed cash deposits in recent years, but have lagged higher-risk funds since the crisis, suggesting there is something in Warren Buffett’s advice that investors should be “greedy when others are fearful”.
Pension funds are the most popular type of investment for Irish people. This is encouraging considering that we’re all living longer and that private pension coverage in Ireland is very low.
Finally, despite market volatility rising this year, Irish investors were still more positive than negative about the outlook. Next year, we too believe equities can continue to move higher – provided the world economy can squeeze out another decent performance in 2019.
Tom McCabe is global investment strategist at Bank of Ireland Investment Markets
Any investment commentary in this column is from the author directly and should not be seen as a recommendation from The Sunday Independent
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