Will you receive a more or less generous state pension in retirement?

In this week’s bulletin:

  • Equity funds are at their most popular for 5 years, though debate rumbles on over the prospects for the global economy.
  • Headline inflation figures continue to exceed earnings growth as the calculation of the Retail Price Index comes under scrutiny.
  • Millions of high-earners will learn today whether they will receive a less generous state pension in retirement, after plans for a flat rate are likely to be unveiled.

Investors plan for 2013

  • Equity funds at their most popular for 5 years
  • Debate rumbles on over the prospects for the global economy
  • Diversification remains crucial to all investors over the long term

It emerged last week that inflows into equity funds have reached a five-year high, as investors react to global markets soaring following the compromise deal on the US fiscal cliff. According to EPFR, the fund research company, net investment into equity funds in the first week of 2013 reached $22.2 billion worldwide – the highest level since September 2007 and the second highest since records began in 1996. At a sector level, net investments into emerging market and global equity funds are at record highs. The only sector failing to see larger inflows was European equities, which saw less than $1 billion invested worldwide last week. According to the Investment Management Association and emphasising the more optimistic view of investors, people have been rotating out of ‘safer’ assets such as government bonds since September.

This news came in a week when the FTSE 100 closed at 6,121.8, reaching levels last seen in May 2008. The rise of 3.8% in the first full trading week marks the best start to the year since 1999, as optimism increases over a US budget deal, easing eurozone tensions and signs of improvement in US and Chinese economies. Wells Fargo, the US bank, also kicked off the earnings season for the US by beating forecasts. Elsewhere around the globe, the S&P 500 in the US closed at a five-year high of 1,472, while Japanese equities stand at two-year highs after a weakening of the yen benefited the export-reliant nation – a position which prompted Richard Oldfield, manager of the St. James’s Place High Octane fund to comment, “In Japan, we have got to one of those moments that, just possibly, in a couple of years’ time, could be looked back upon as a turning point.”

“The stock markets have not been lacking in good news recently, though some of it is better described as an absence of bad news.”

Editorial, Financial Times, 12 January

Given the positive economic sentiment of the last week, it was perhaps a surprise to see commodities slipping as copper fell 1.2% and crude oil slumped 1.6%. Further muddying the water over prospects for the global economy, some currencies that are usually highly correlated with a better global economic outlook were also in retreat; the Australian dollar, for example, gave back most of its recent gains. As ever, making sense of short-term movements is an extremely difficult task.

There are still, of course, challenges to be faced and it is important to keep focused on the bigger picture. As John Wood of J O Hambro Capital Management, joint manager of the St. James’s Place UK & General Progressive fund, pointed out recently, “At this time of year fund managers are often asked to call upon their crystal ball and make sage-sounding predictions about the year ahead. I suspect if I referred to my commentary from this time last year, its message would be roughly the same; the Western world remains in a multi-year period of structural deleveraging, meaning that material economic growth is going to remain elusive for some years to come.”

In the US, investors are cautiously looking ahead to company earnings in the coming week, particularly those of Goldman Sachs and Citigroup, while Washington is yet to raise the debt ceiling and address the planned spending cuts that could weigh on the economy. There is a school of thought that says company results have been overestimated by analysts, while it is clear that no real solution to the US budget problems was provided over New Year. In Europe, eurozone leaders still haven’t fully convinced markets that they are on top of their particular issues, despite comments on Friday that the worst may be over; though reaction to European news flow is certainly more muted than at any time over the last three years.

Overall, 2012 was a strong year for most asset classes, especially compared to the difficulties experienced in 2011. As always, some asset classes fared better than others. It is important to remember that the benefit of holding a diversified portfolio of funds for the long term is to help capture the cyclical nature of returns from different asset classes and cushion the falls to reduce volatility and achieve more consistent returns.


Inflation still a threat

  • Headline inflation figures continue to exceed earnings growth
  • Calculation of the Retail Price Index comes under scrutiny

Figures this week are set to show that the headline rate of inflation, as measured by the Consumer Price Index (CPI), has climbed to 2.8% as a result of upwards pressure on energy and food costs, as well as hikes in the cost of public transport. The rate of CPI stood at 3.6% at the beginning of 2012 but dropped to 2.2% in September. Some economists believe the rate could be back over 3% within three months, and British workers face a fourth consecutive year when earnings growth does not keep pace with inflation. Recent figures show that average earnings rose 1.7% for the year in 2012.

The Retail Price Index (RPI) is expected to register a figure of 3.2% for December. Government statisticians had recently been debating whether to change the composition of RPI, which would have resulted in a lowering of the rate (to around 2.1%); but last week they decided to leave the structure unchanged, despite admitting the current calculation was “not up to international standards”. In a recent report, the Office for National Statistics criticised the index, saying that it would not choose the current method of calculation if constructing the index from scratch. Pensioners will be the winners from this decision as they will continue to see benefits rise based on the current methodology. However, retailers will lose out due to their business rates being linked to the headline RPI figure, leading the British Retail Consortium to criticise the current RPI calculation as “inherently flawed”.


Regardless of how it is calculated, when inflation is at relatively low levels, it is easy to overlook the adverse effect it has on your capital and the income it produces. Left to the effects of inflation, your money would have lost 36% of its purchasing power over the last fifteen years (source: Financial Express, 14 January 2013). And as improved life expectancy means we can look forward to a longer retirement, the impact of inflation will become even more of a consideration. UK interest rates are at their lowest level in history and market expectations are that they will not increase significantly for a number of years. The average rate for an instant-access cash account is currently 0.86% (source: Moneyfacts, 12 January 2013), pressuring many to increase the risk taken with their savings in order to keep pace with inflation. History shows how the long-term trend between inflation and interest rates has changed in recent years – the period of ‘complacency’ that started in the 1980s, which saw interest rates exceed inflation, is an increasingly distant memory. But the challenge for savers and investors remains the same: how to maintain the spending power of capital and our standard of living. The need to invest in real assets is as important now as it ever has been, but the risks are naturally higher than they would be in cash.


State pension changes

Millions of high-earners will learn today whether they will receive a less generous state pension in retirement, after plans for a flat rate are likely to be unveiled; it is expected to be around £145 per week, rising to £160 in 2017. The long-awaited government white paper should cement plans to merge the Basic State Pension with the State Second Pension and Pension Credit. The flat rate would benefit many women and the self-employed, but many higher earners will see less at retirement and those in final salary pensions may pay more in National Insurance contributions.

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