Three years into the cost of living crisis: which investments performed best?

In August 2021, the inflationary crisis began to take off with the CPI measure of inflation jumping to 3.2%, up from 2% in July of that year. Consumer price inflation then climbed all the way up to a peak of 11.1% in October 2022 before gradually, and painfully, falling back to current levels. The latest inflation figure crept up a touch to 2.2%, but this is well within normal levels of variation around the target and was also accompanied by falling core inflation.

Three years on from the beginning of the cost of living crisis, the scars still haven’t healed, but the worst is now firmly in the rear-view mirror. The inflationary crisis had a profound effect on the savings and investment landscape, prompting rising interest rates and a sell-off in previously unassailable parts of the market, in particular bonds and technology stocks.

Looking back on performance over the past three years since the cost of living crisis began it’s clear that some investments have helped investors grow their wealth in the face of rising inflation, while others have capitulated in its presence.

Investment returns over the last three years

Source: AJ Bell, Bank of England, FE, ONS, Cointelegraph. Total return in GBP to 12 August 2024, CPI and cash returns to July 2024.

Gold and Bitcoin

Gold has made good on its promise as an inflationary hedge over the past three years, carving out a healthy real return for investors (see table above). That’s despite rising interest rates, which should in theory take the shine off the precious metal. The economic and geopolitical uncertainty of recent years has helped propel gold upwards. But it’s actually been central banks behind the buying action, with gold ETFs seeing a number of years of outflows. ETF redemptions may be a result of investors getting lured away by cash, and bonds yields now don’t start with a zero. Meanwhile central banks have been attracted to gold because it’s liquid, carries no credit risk, and is free from any geopolitical interference.

Gold has also trumped Bitcoin over the past three years. While some may view Bitcoin as a store of value or an inflation hedge, the wild swings in the price of the cryptocurrency suggest it can’t be relied on to fill either role. In the short term, the US presidential election may exert a gravitational pull on Bitcoin now Donald Trump has thrown his weight behind crypto and promised the attendees of the Bitcoin 2024 conference that he would fire the head of the SEC on day one of his presidential term. The longer-term investment case for Bitcoin relies on it being adopted by consumers, businesses and investors, which is still a highly speculative snapshot of the future.

Research compiled by the Bank of International Settlements estimates that around three quarters of Bitcoin buyers between 2015-2022 were likely to have lost money, despite a huge rise in the price of the cryptocurrency over that period. That’s almost certainly because they got sucked in at precisely the wrong time. However, looking back to before Bitcoin hit the mainstream, the returns have been other-worldly for very early backers: £10,000 invested 10 years ago would now be worth over £1 million in real terms.

As ever gold remains worthy of consideration as a portfolio diversifier because it behaves differently to other asset classes, but it shouldn’t make up more than 5 to 10% of your portfolio at most. While gold is known as a safe haven, it is volatile, and despite having a reputation for being an inflation hedge, it has endured long periods of below inflation returns. Meanwhile those who wish to hold Bitcoin should do so with only a small amount of money which they are willing to lose in its entirety.

Cash and gilts

It will perhaps come as a shock to learn that against a backdrop of rising interest rates, the average Cash ISA has registered a negative real return of -12% over the past three years, meaning £10,000 saved would now be worth £8,802 after accounting for inflation (see table above). That’s partly because cash rates have only risen gradually, and partly because not all accounts are offering competitive rates. Inflation has also provided a high bar in the past three years, which even the most competitive current rates wouldn’t have hurdled. Now inflation has become more temperate the best cash rates are offering an inflation-beating rate of return, but for long-term holdings savers are likely to get a better return from the stock market. Data from Barclays shows that over a 10-year holding period, UK stocks have beaten cash over 90% of the time.

UK Government bond, or Gilt, investors were some of the biggest losers from the inflationary spiral. Low interest rates and Quantitative Easing from the Bank of England pushed up government bond prices for over a decade, priming the gilt market for a big spill. In real terms gilts have lost over a third of their value in the past three years. This has had knock-on effects on diversified strategies that invest in gilts, such as 60-40 funds or mixed asset funds more generally.

The pain has been particularly acute and untimely for those approaching retirement in lifestyled pension schemes, which hedge against annuity rate movements by investing in long-dated bonds. The typical annuity-hedging fund has lost almost half its value in real terms over the past three years, with £10,000 invested now being worth £6,306, or £5,246 after accounting for inflation. Annuity rates have risen by a similar amount but that’s cold comfort if, like 90% of retirees, you’re not buying an annuity with your pension pot.

Global and UK shares

Both the global and domestic stock market have managed to stay ahead of inflation over the past three years, which given soaring price rises is no mean feat (see table above). The FTSE 100 in particular has stood up well, and its performance is in line with the global stock market. This isn’t an entirely congruous result seeing as the UK stock market has been a laggard on the international stage for a while now, but the inflationary nature of the past three years has actually helped large cap UK stocks regather some lost ground.

That’s partly because the FTSE 100 contains a large dollop of oil and gas companies, which have benefitted from higher energy prices. On top of this, banks have seen their net interest margins rise as the Bank of England base rate has climbed. The FTSE 100 also has more stocks that prospered in the market rotation that took place when inflation started its ascent, eroding the value of more distant cashflows. The recent AI-fuelled technology boom has banished memories of 2022, when the S&P 500 fell by 8% in sterling terms while the FTSE 100 eked out a 4.7% return – an uncharacteristically favourable performance wedge for the UK stock market.

Best and worst performing individual shares

The top of the table of the best performing individual shares in the FTSE 100 over the past three years (see table below) is dominated by what might compassionately be called old economy chuggers. Beyond macroeconomic trends there are also some stock specific recovery stories in here in the form of Rolls-Royce and Marks & Spencer. The bottom of the table is more of a motley crew of fallen growth angels (JD Sports, Burberry), macroeconomic casualties (Persimmon, EasyJet) and stock valuations being pared back after a dizzying ascent (Scottish Mortgage, Spirax).

Source: AJ Bell, Sharepad. Total return in GBP to 12 August 2024.