Shop around for the best rates on cash deposits

Step forward Lloyds TSB in the UAE with the best rate for a deposit account of 4.85%. Yes that is right: you take absolutely no risk with your capital and get a guaranteed 4.85% on a minimum deposit of Dhs100,000 for one year with no administration fee for early breakage.

If this was a hedge fund investors might be asking how can they do it! But no this is just a humble cash deposit account, offering a guaranteed 4.85% return on guaranteed capital.

Alternative investments such as real estate and local equities might offer better long-term returns but in the event of a downturn your capital is at risk. Investors in local Arab stock markets hardly need reminding that share prices can go down as well as up; companies can also go out of business altogether with a 100% capital loss for shareholders.

Real estate peaking?

Many people also feel that real estate prices are near to a peak now. Again investors have to consider whether risking a loss of capital is worth the gain of a 7-8% average rental return before maintenance costs. Home owners buying over a 15-year mortgage period can ride out the cycle but investors usually have a shorter time horizon.

This was not such a difficult calculation to make when interest rates on deposit accounts fell to less than 2% a few years ago. Now cash deposits offer a much more attractive risk-free return when compared to local equities or even real estate.

Of course, there is always a caveat, rising inflation in this case. For inflation in the GCC states has taken off strongly in recent years and higher rates of interest on a deposit account may only safeguard its buying power and provide little in the way of a real return for investors.

That is why cash deposits are unlikely to be a long-term option for many investors. But they are a safe haven in uncertain times, and more attractive now than for some years.

Gold too high?

Investors in cash deposits should also consider holding some of their portfolio in gold and precious metals. However, the recent bullish performance of these metals - silver is up 30% this year for example - leads some commentators to expect a correction soon, and so again a humble cash deposit looks the safest option.

Commodity pessimists reason that if there is a synchronized sell-off of equities around the world, and a global real estate crash, then gold and precious metals will be sold off to meet other commitments and suffer in the general decline.

In this scenario cash is king as money on deposit will be able to buy more than before an asset price crash, while all other assets will be worth less. Even for the much maligned US dollar this would mean an upward revaluation in real terms.