FTSE 100 started 2021 with a rally, rewarding investors like me who’d bought UK shares last year. The recovery has stalled but I’m hoping there’s more to come.
Fund platform AJ Bell has come up with five reasons why this could be a bumper year for Stocks and Shares ISAs. The time to buy UK shares is before a stock market rally when they’re still cheap. So I reckon there’s a good buying opportunity for me today. Here’s why.
The UK’s £153bn war chest
As Laith Khalaf, financial analyst at AJ Bell, points out, UK consumers have built up a massive cash war chest while being stuck at home during the pandemic. Households saved £153bn in bank and building society cash accounts in 2020, up from £55bn in 2019, Bank of England (BoE) figures show. Balances are building up during the latest lockdown, mostly in cash, but could fly into UK shares during the upcoming ISA season.
Cash offers lower return than UK shares
BoE figures show the average instant access deposit account pays just 0.06%, while Cash ISAs are little better at 0.32%. The BoE expects inflation to hit 2.1% over the next year, which will further erode the buying power of cash. Cash has its place in any savings strategy, but it’s not the way to grow wealth. UK shares are more risky, but offer a substantially better return.
Taxes will rise
Chancellor Rishi Sunak has a fiscal black hole to fill. He may not hike taxes in next week’s Budget, but rises will come. Capital gains tax hikes look baked in and this will make the ISA wrapper even more valuable because it shelters gains from CGT, and dividends from income tax.
Economic rebound will boost UK shares
The BoE expects the UK economy to grow by 14% over the next year, assuming vaccines deliver us from social restrictions. That should spell good news for UK shares, as people start spending and company earnings rebound sharply.
The ISA allowance has never been this generous
At launch in 1999, I could invest just £7,000 in a Stocks and Shares ISA. Now the allowance is £20,000. Plus there’s the Junior ISA on top, which gives families another £9,000 per child. As cash slumps and UK shares climb (and pay dividends) more of this should go into the stock market.
That’s the bull case for UK shares. Naturally, plenty could go wrong. Mutant variants could undermine vaccine success. Unemployment will rise sharply once furlough ends. When the Chancellor does hike taxes, investors will feel poorer.
Any prediction about share price movement should be taken with a pinch of salt. Nobody can consistently second guess markets, There are too many variables. However, history shows us that in the longer run, UK shares go up more than they go down. I’m investing for a minimum five to 10 years, and over such periods, I’m betting equities will beat almost every rival asset class.
