consumer confidence in the eurozone shows a remarkable turnaround

In this week’s bulletin:

  • US equity market hits 5-year high as New Year ‘risk on’ momentum is maintained.
  • More High Street names fail as fourth-quarter UK retail sales disappoint, but consumer confidence in the eurozone shows a remarkable turnaround.
  • As the government tinkers with pensions, record-low Cash ISA rates reinforce the need to make the most of all available tax reliefs.

 

Winter Wonderland

A sense of magic descended on the schoolchildren of the UK on Friday as a blanket of snow covered much of the country.  Investors prevented from going to work or from completing their other daily activities may have felt a similar sense of wonder on reviewing their portfolios.  After the strong finish to 2012 resulted in most investors seeing double digit returns, many have been surprised to see this momentum carry on into the first few weeks of the New Year. The FTSE100 Index is up 4% year to date to 6154 and in the US, the S&P500 climbed to its highest level since the start of the financial crisis 5 years ago. At the same time, the VIX index, the so-called ‘fear gauge’, fell to its lowest level since 2007 as reduced volatility has led to an increased demand for equities.

However, this increased demand for equities seems, as yet, to be confined to institutional investors, according to The Financial Times.  The latest study by Bank of America Merrill Lynch suggests 50% of investment managers are looking to move out of bonds and into equities over 2013.  Managers are holding their lowest cash levels since early 2011, suggesting they don’t want to be left behind as markets continue to rise.  Of course, this move to ‘risk on’ investing has not been so positive for the gilt market.  After rising by 38% over the 4 years to the end of 2011, the FTSE Gilts All Stocks Index has fallen by 2.5% since the start of last year.  As we have said many times in the past 12 months, with yields at less than 2%, holding gilts must be seen as an insurance policy against the world economy taking a sudden turn for the worst rather than a strategy designed to generate significant returns.  Certainly, gilts with a long time to maturity are those most at risk to an upturn in the global economy. However, for cautious investors, retaining some gilts alongside corporate bonds, property and equity remains a sensible investment strategy.

 

Conflicting consumer news

  • More bad news on the High Street
  • Contrasting messages from across the globe

After the previous week’s news about Jessops, last week saw the failure of two more familiar High Street names as both HMV and Blockbuster were placed into administration, potentially leading to the loss of up to 10,000 jobs.  Many commentators noted the failure of all three to adapt to technology and the impact this has had on consumer behaviour.  The growth of internet shopping and downloads appears to have re-written the rules for traditional audio and visual High Street retailers.

However, the latest retail sales figures suggest that these three are unlikely to be the last High Street casualties.  December’s figures showed a 0.1% monthly drop in sales volumes, reflecting a disappointing period on the High Street over Christmas, and gave further evidence to fears the UK may be entering a ‘triple dip’.  Sales for the fourth quarter as a whole were down 0.6% and do suggest that growth figures for the final quarter will show that the UK economy shrank.  We will know more on Friday when initial GDP estimates are released for the end of last year.

Further afield the news was generally more positive.  Whilst doubts still persist about the sustainability of China’s rebound, news that their economy grew by 7.9% relative to 12 months earlier does suggest that the new political leaders managed to avoid the hard landing that has concerned the West for the last year or so.

Meanwhile, closer to home there has been a remarkable turnaround in sentiment within the eurozone.  The latest consumer survey shows sentiment improving in Italy by 2%, Germany 1% and France 0.4%, but perhaps most remarkably of all, Greek consumers are 5.1% more positive as fears of the eurozone collapsing appear to have reduced significantly.  Mario Drahgi’s promise last year to do ‘whatever it takes to support the eurozone’ appears to have had the desired effect for now.

Supporting this view was news from the so-called PIGS (Portugal, Ireland, Greece, Spain) that government debt levels had fallen from financial crisis highs.  As debt levels have fallen, balance of payments have improved hugely as imports have shrunk and exports risen and the all-important cost of government borrowing has fallen to more sustainable levels.  Whilst still in the grip of austerity measures, Ireland in particular seems to be benefitting from quick and decisive action taken by its government at the height of the crisis.

Across the pond, despite on-going concerns over the so-called ‘fiscal cliff’, economic news continues to be positive.  Housing starts are at a 4-year high and house prices jumped in the last part of 2012.  And unlike the UK, consumer spending remains high as retail sales were up 5.2% over the year as a whole.  Yet, of course, with the threat of tax increases and benefit cuts still looming, it is difficult to forecast how US shoppers will behave in the coming months.  President Obama, newly sworn in for a second term, still has plenty of challenges ahead.

Amidst all this conflicting news, as we enter the sixth year of the global financial crisis, David Smith in The Sunday Times reflected on how well political leaders have behaved in order to avoid exacerbating the worst effects of the crisis.  At the outset of the crisis we commented on the importance of countries co-operating rather than putting up trade barriers and repeating the mistakes made by leaders during the Great Depression, which only served to prolong the misery.  However, there is a growing threat arising from deliberate attempts by governments across the globe to devalue their currency as they find ways to make their economies more competitive. As with erecting trade barriers, this has to be avoided at all costs.  On balance, whilst news will undoubtedly remain mixed, there are some encouraging signs that 2013 will see a gradually improving global economy.

 

Taxing times for savers

  • A revised state pension for all
  • Savings rates continue to struggle

In yet the latest shake-up of the pensions system, the government announced a move to a new flat rate state pension of £144 from April 2017.  Most commentators approved of the drive towards greater simplicity as the legislation will also remove the complicated means-testing and earnings-related additional pensions.  However, as with all changes, there will be winners and losers – the devil is in the detail.

One can only hope this is the last in a series of changes to both the state and personal pension regime, thus providing greater certainty for people as they plan for their retirement.  With generous reliefs still available for saving via personal pensions and, despite the latest announcements, a comparatively poor state system, one thing is for certain – the need to take responsibility for one’s own retirement has never been greater.

As we approach the tax year-end, thoughts naturally turn to using the annual ISA allowance.  But data from Moneyfacts highlighted just how difficult it remains to generate inflation-beating returns from deposits with interest rates so low.

According to Moneyfacts (16 January 2013), the average instant access Cash ISA rate has fallen to 1.79% and with inflation remaining stubbornly above target at 2.7%, savers are losing money in real terms.  Many see this collapse in savings rates as a direct consequence of the introduction last year of the ‘Funding for Lending Scheme’, designed to wean banks off the need to fund new lending from deposits.

Whilst Cash ISAs may be appropriate for some, those investing for the long term should consider using their full allowance of £11,280 to invest in assets likely to generate real returns and a potentially rising income stream.  As always, getting the right balance in one’s portfolio is crucial to the future returns.

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