MARCH 2015

Investing in uncertain times No more safe havens What can I get nick carn tax-free? Will the UK grow lucy tobin faster than others? anne richards When will rates rise? james sproule

In association with We explore all angles. So we really know what’s happening. When we look at investments, we never take things at face value. Our instinct is to ask what could go wrong, as well as what could go right. Experts call this due diligence. We think – from any point of view – it’s simply common sense. The value of investments and the income from them can go down as well as up and you may get back less than the amount invested. For more information please visit aberdeen-asset.com

Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the UK.aberdeen-asset.com

121018395_ADVLEMUR.indd 1 28/01/2015 09:42 PROSPECT MARCH 2015 3

Contents A world of trouble

Investors face an extraordinary year ahead. Recovery is underway in the 4 No more safe havens 9 Property: a moment of sobriety and United Kingdom, even if vulnerable. “Safe” investments have vanished. Are we heading for a fall? Yet Britain, one of the most apparently Nick Carn Lucian Cook stable countries in the in recent years, faces an election that could 6 How should you invest overseas? 10 What can I get tax free? lead to radically different outcomes: a Look at companies, not Protecting your returns is more referendum about EU membership, or so big a role for the Scottish National Party economies. important than ever. that the break-up of the UK again becomes Anne Richards Lucy Tobin an open question. Greece is challenging the eurozone’s fundamental rules and 8 When will interest rates rise? 12 A world of trouble: the figures Germany’s financial leadership of the The UK is not an island. at a glance currency bloc. is slowing down; James Sproule Russia is encroaching to Europe’s east. 14 What to do before the election Meanwhile, interest rates remain close to Protect your . zero. How should investors pick a path through this? Ruth Jackson

Join the ideas club!

You will get: Subscribe today from just £2.67 per month • The finest writing and receive a free Prospect mug on politics, culture and economics Enjoy the finest writing, cartoons and puzzles. Join us today for just £3.08 per month for a print and • The Prospect app digital subscription, saving 38% off the shop price, • Discounted tickets or £2.67 per month for digital only, saving 46%. to Prospect events

• A free Prospect mug

• Unlimited access to the Prospect website and archive

• Special “Prospect has become the focal point for informed debate in the UK” supplements on the —Martin Wolf, Chief Economics Commentator, Financial Times global economy, Call 01795 414 957 and quote code MARCH15, or visit energy, investments prospect.subscribeonline.co.uk and type the code into the and more promotion box. 4 PROSPECT MARCH 2015 No more safe havens

and volatility involved in, for example, difficulties for investors—the price of safety stock market investments. Switzerland— has soared to such an extent that “safety” which earlier in January demonstrated now means guaranteed losses. - “Safe” investments that it was not prepared to go along with linked bonds and cash deposits have in have vanished the eurozone’s burgeoning monetary the past provided modest but still positive experiment and abandoned the Swiss franc returns. These options are no longer Nick Carn peg to the —now charges holders of available. Risk averse investors, or those Swiss francs 0.75 per cent a year. The seeking a low-risk home for some part of ach year since the financial longer you invest the less money you have their portfolios, now face a dilemma. They crisis, most forecasters have at the end—the financial world turned need either to accept that their investments overestimated both economic upside down. will almost certainly lose value or be growth and inflation and Uncertainty is so integral to investing prepared to take higher risks just in order 2015 began with what is that the idea that there is a direct to break even. Savers are forced to become Erapidly becoming a tradition as the relationship between the riskiness of an speculators or face a slow liquidation. International Monetary Fund once again investment and its prospective return is one This unattractive—some would say cut its forecast for the world economy. of the linchpins of academic investment unfair—state of affairs is quite deliberate. Government budgets are constrained theory. It is also true, as generations of The object of current policies is to make by the consequences of years of subpar investors have learnt to their cost, that the cash and risk-free investments an growth and interest rates are already investments which appear most solid and embarrassment. It is hoped that the feeling at rock bottom levels. The fall in the oil certain at the time often prove in retrospect of money burning a hole in the pocket will price threatens another period of falling to have been among the worst. Navigating ignite those economic animal spirits which consumer prices as it makes its way between these sometimes apparently have so far proven to be such damp squibs. through the system. With the limits of contradictory propositions is a challenge Although that may sound rather feeble conventional stimulus policies already without a simple solution. it should be pointed out that this comes reached, quantitative easing (QE)—in about as close to a theory of quantitative which a buys assets from the easing as one is likely to find. Indeed private sector, thereby boosting the quantity “Savers are now forced to Ben Bernanke, the outgoing Chairman of of money in the system—has increasingly become speculators. This the and one of the first become the norm. Its success or failure will unattractive—some central bankers to initiate a quantitative determine the fortunes of investors. easing programme, last February famously The ’s would say unfair—state quipped that “The problem with QE is that announcement of a programme of QE at its of affairs is quite it works in practice but it doesn’t work in January meeting means that the eurozone theory.” Even as it stands, the comment has joined Japan, the United States deliberate” about it working in practice is perhaps true and the United Kingdom on this global of the US but rather less certain elsewhere; standard. In spite of German misgivings the While uncertainty is a constant, the Japan has implemented a variety of programme will involve buying sovereign form it takes changes. Since the financial monetary programmes without avoiding a bonds at a rate of €60bn per month, crisis of 2008 world economic growth prolonged period of very weak economic thereby putting more money in the hands and inflation have consistently come in growth. of banks and the private sector in general. below expectations and governments Although there are sceptics, the current The hope is that this injection of cash will and central banks have resorted to more consensus tends towards thinking that the lead to more borrowing and spending. The and more unconventional measures to problem with QE is that there is not enough intention, of course, is to support growth try and jump start economies. The result of it—or at least that in a world of very low and employment in Europe where, ever has been a relentless decline in interest inflation it is a very low-risk strategy. Seen since the financial crisis, recovery has rates, in many cases to the lowest levels from a different perspective, however, what failed to gain traction. ever recorded. Short-term interest rates is immediately striking is that it appears On the face of it this is good news for in a growing number of currencies—the to start at the wrong end. Conventionally, investors. Both bond and stock markets Japanese yen, the Swiss franc and the euro money does not create activity, rather it is have rallied—European stock markets are among them—are now negative, meaning the reward or consequence of it, or perhaps now at the highest level for years and long- that when you deposit money you receive the lubricant in the machine; in this case term interest rates, which were already very back less than you originally lent. In several the monetary tail is expected to wag the low by past standards, have fallen again— bond markets, including the UK, long- economic dog. resulting in capital gains for bond holders. term inflation-adjusted interest rates are Notwithstanding Bernanke’s belief that, It has, however, done something else also now negative, ensuring that investors in the US at least, QE worked in practice, besides: it has reduced still further the in these instruments, however much they there are legitimate concerns that it might prospective return on safe assets. No longer may have benefited in the short run, will not work so well in other circumstances. can investors find a quiet corner where, over the long term surely lose purchasing With so many economies struggling to in exchange for accepting modest returns, power. maintain altitude much rides on the they were once able to opt out of the risk This poses some very particular success of this untried policy. PROSPECT MARCH 2015 INVESTING IN UNCERTAIN TIMES 5 REX/INTIME NEWS/ATHENA © REX/INTIME Alexis Tsipras (left), Greece’s new Prime Minister and leader of Syriza, with Pablo Iglesias, leader of Podemos: the parties pose a challenge to the status quo

Whereas the stakes are high in Japan, concentrating the minds of Europe’s elite. European governments had collapsed which finds itself back in recession once If continued recession delivers victory to before the programme was implemented; again, they are still higher in the eurozone. Marine Le Pen of the Front National, then even Spain borrows at less than 1.5 per Various forms of financial intervention the euro faces its most serious existential cent. It’s hard to know how important have so far succeeded in defusing a threat yet. the effect of falling interest rates was in series of financial crises but prolonged Evaluating the prospects of success the case of the US but clearly this is not a recession now poses a more intractable for the eurozone’s version of “wag the following wind on which the eurozone can set of problems. Reductions in interest dog” economics is not easy. In the US, hope to rely to the same extent. Where the rates and promises of “whatever it takes” quantitative easing was accompanied announcement has been more effective is tranquilised financial markets but austerity by big falls in interest rates as well as by in weakening the euro and this will, in line and high levels of unemployment are now falling risk premiums, meaning that poorer with conventional theory, tend to support taking politics beyond where either the quality borrowers also saw their borrowing economic growth. While helpful, the fall central bank or the established political costs fall. seen so far will not on its own be enough to parties hold sway. While the rise of Syriza In the eurozone, interest rates are reduce unemployment sufficiently to draw in Greece and of Podemos in Spain—the already very low—German two-year the sting of radical politics. QE shorn of its two leaders shared a podium at a rally in interest rates are a negative 0.19 per cent interest rate and currency consequences Athens just before the Greek elections— and even 10-year government bonds yield will need to demonstrate that it has some are a challenge to the status quo, it is only 0.36 per cent. With the exception of potency of its own. the French elections in 2017 that are Greece, the borrowing costs of the other With risks apparently so skewed in 6 INVESTING IN UNCERTAIN TIMES PROSPECT MARCH 2015

the direction of economic activity being clocking up huge losses will not be popular. pursued without fully achieving its object. too weak and inflation too low, policy has As usual this is likely to be particularly An environment in which investments rise moved relentlessly in one direction with contentious within the eurozone, where in value as interest rates fall is what we are perhaps little thought of the road back. burden sharing between countries is one of currently enjoying. The US Federal Reserve had a nasty shock the most vexed issues. While investors must hope that QE is not in 2013, the so called “taper tantrum,” has been designed to too successful, they need to worry about when it indicated that it would begin to drive investors out of safe assets, in particular its consummate failure as well. Whereas reverse QE. Long-term interest rates rose cash, and has so far been fairly successful. the attractions of risky assets are boosted sharply and the economy slowed abruptly. Economies are still weak and this apparently by lowering the return on risk-free assets, a A lot of verbal reassurance and still lower costless policy is likely to continue. While sustained period of falling consumer prices interest rates were required to get things it continues, it is likely to support asset reverses the process. As soon as back on track. The system in general and prices—indeed this is one of the channels takes hold the real return on cash assets investors in particular have become used through which, by boosting confidence, it is immediately starts to rise. A deteriorating to very low interest and were rates to return intended to work. For investors, though, it economy and an improving return on to normal this would impose huge losses contains the seeds of its own destruction. The cash can rapidly become a self-reinforcing on bondholders and probably on owners assets that have been the beneficiaries of QE, process. For students of the 1930s, including of stocks and property as well. Prominent particularly long-duration bonds, become its of course Bernanke and the current Chair among the owners of bonds, of course, are victims as soon as the policy is successful, of the Federal Reserve, Janet Yellen, this the central banks themselves. Politicians economies take off and interest rates return to represents the sum of all fears. are used to central banks making big more normal levels. Ironically, the sweet spot Nick Carn is the founder of Carn Macro contributions to government revenues; for markets is the period during which QE is Advisors

How should you invest overseas?

way that a particular company operates the rise of minority parties have added a within it. political uncertainty to the economic one. Let’s start with the United States. Overall, Quantitative easing (QE) by the European Look at it looks in reasonable shape. Its companies Central Bank has helped a little, largely companies, have been finding growth overseas, in the through weakening the euro, but it won’t not economies emerging world (look at Apple’s international be the same catalyst to recovery that it sales), but the strength of the US dollar was in the US. Why did QE work so well Anne Richards has meant that when translated back into there? First, it was introduced very rapidly. dollars those results don’t look so good. The Ben Bernanke, then the Chair of the he first thing to remember is that American market may now have to rely Federal Reserve, had studied the Great if you buy the All-Share Index more on domestic earnings to push forward. Depression of the 1930s and knew policy or the FTSE 100 or FTSE 250, Given how fragile the international recovery had to be loosened drastically to prevent you are immediately getting a lot is, I would expect the Federal Reserve to err a similar deflationary spiral. And second, of overseas exposure. Overseas on the side of caution; after all, patience is the authorities also moved very quickly to Tearnings make up more than 50 per cent the hallmark of Janet Yellen, Chair of the recapitalise the banks so they could resume of those companies’ total earnings. The Federal Reserve. The moment when interest lending to businesses, feeding through United Kingdom’s economy and its stock rates have to rise has probably been pushed to the real economy. It took a while but it market are very different; the latter is not a back yet again. worked. proxy for the former. Turning to “emerging markets,” we In contrast, the European Central Bank, However, there are some sectors should remember that they are more than was raising interest rates even as late as that are easier to get exposure to if you 50 per cent of global Gross Domestic 2011 to fight an inflationary problem that venture abroad—UK indices don’t have, Product and there are a whole range of simply did not exist—it was fighting the for example, a big technology sector. So differences between individual countries. wrong war. Banks, under pressure from the search for more exposure to more We cannot treat , Russia and China in regulation to increase their own capital, industries, in order to build a diverse the same way, for example: they each have have been unable to increase lending portfolio, might in itself send you to their own dynamics. The kind of questions to business—and since the European look at investments overseas. Don’t buy that investors need to consider are: what is corporate sector is even more reliant on international shares just to get exposure the rule of law and how are your direct bank lending than its US equivalent, to other currencies, though. The country as minority shareholders or bondholders it will be a while before we see a business- of listing is a poor proxy for that. And don’t protected? India, to take just one example, led economic recovery in Europe. just be tempted by the growth story of the has seen some positive momentum Anne Richards is the Chief Investment economy as a whole. You need to look recently, reflecting a strong central bank Officer of Aberdeen Asset Management closely at companies themselves, as we do Governor and a reformist political agenda. at Aberdeen Asset Management, analysing Turning to Europe, the big shift in voting and understanding the industry and the patterns right across the continent and A view from our sponsor EPERF UR EC T T IC P # N WIDAY A HOLI T # C P E IC F T R U R EP E

Luxury Cruise • Wine Country California Tee off in Dubai • Marvellous Mauritius 8 INVESTING IN UNCERTAIN TIMES PROSPECT MARCH 2015 When will interest rates rise?

The UK cannot as indebted as Europe, something to be avoided at all costs. protect itself from But is deflation really a case of developments in consumers delaying purchases waiting for the eurozone a price drop? It seems far more likely that consumer confidence declines in response James Sproule to long-term economic stagnation— just ask any southern European. In such onetary policy is viewed by circumstances fear comes to the fore and many people as being dull more and more purchases are delayed, not and technical: nebulous in anticipation of falling prices, but in the concepts about the money absence of optimism about the future. supply, theoretical output In an effort to break this vicious circle, Mgaps, expected inflation rates. This is not as well as to kill any renewed eurozone the sort of stuff that sets many pulses crisis, the European Central Bank has racing; the eyes of even the most well- launched a trillion euro quantitative easing informed consumers can be forgiven for (QE) programme, following in the wake glazing over. of similar programmes elsewhere. For the But high street prosperity needs interest United States and UK at least, QE has been rates that neither constrain nor artificially credited with being an integral part of their boost businesses and consumer spending. broader economic recovery: clearly the It is a balance we are in danger of being European Central Bank hopes for similar unable to manage. results. The United Kingdom is experiencing a double interest rate record. Not only have the interest rates never “Quantitative easing is been lower in the 321 years of the bank’s not a substitute for the existence, February 2015 was the 72nd reforms to labour and consecutive month of those low rates. Traditional interest rate policy has ceased product markets that the substitute for the kind of structural reforms to work, leaving the Bank of England to EU needs” to labour and product markets that the devise what officials have admitted are European Union needs. extraordinary measures. Just to make their views on the matter What is going on and when might we Eurozone quantitative easing envisages crystal clear, the Germans have insisted see interest rates again become dull and banks lending the new cash, which means that bond purchases are made by individual boring? that bankers must be confident that their central banks, not by the European Central If ever you needed convincing that existing loans are solvent and that the new Bank itself—an insistence that means any economics should be considered an art loans they make are equally prudent. potential defaults will not sit at the centre, rather than a science, look no further While recent banking stress tests but with the problem countries themselves. than the calculation of interest rates. may have allayed some doubts, financial So much for European solidarity. How this Most economists depend on some sort of markets remain concerned. Moreover, all plays out is anyone’s guess but that it quantitative model to guide policy and these bankers remain understandably cautious will have a direct effect on the UK economy suggest we can wait. But the mechanistic about lending, which seems justified when is without doubt. arguments are missing the point. looking at the poor macroeconomic outlook “Fog in the channel, continent cut off,” is If monetary policy were normal, clearly across the eurozone. And so a vicious circle an apocryphal headline with strong appeal there would be no pressure to raise rates, ensues. to UK Independence Party supporters, but but we are not in normal times and with the But for many policymakers, an even it is a poor way to run monetary policy. So UK economy seeing solid economic growth, bigger danger is that eurozone countries will long as the eurozone languishes, there is there must be something else that is driving use the money to support continued deficit little chance of higher interest rates, here or policy. spending. there. That something else is the threat of This will more than likely provide a However justified a rise in UK rates deflation and the fear of a renewed crisis in short term Keynesian boost but at a cost might be, fears remain that it would trigger the eurozone. of allowing politicians once again to avoid an export choking surge in sterling. Not Commentators seem convinced tough decisions. This will ultimately set being a part of the euro may insulate the that deflation means two things: that the eurozone on the road to Japanese-style UK from deflation, but as far as interest debt becomes more expensive and that stagnation and eventual deflation. rates are concerned we are not and will consumers delay purchases as they await European Central Bank President never be an island. further price drops. The first part of this is Mario Draghi has made it clear that QE is James Sproule is Chief Economist at the a mathematical truism, and for a continent not, should not and cannot be seen as a Institute of Directors PROSPECT MARCH 2015 INVESTING IN UNCERTAIN TIMES 9 Property: a moment of sobriety

House prices in as the number of mortgage approvals and entrenched. Arguably these regulations the change in new buyer enquiries, indicate are a case of shutting the stable door London won’t rise that price growth will be muted in 2015, seven years after the horse has bolted. this year—but there with the real possibility of prices softening in Nonetheless, together with the prospect of are still investment parts of the capital. higher interest rates over the medium term, While fickle market sentiment is partly they are likely to act as a drag on house opportunities behind this, the recent introduction of price growth at a national level, making Lucian Cook mortgage regulations is likely to have a more it much more dependent on improved fundamental and longer-term impact. By earnings. stress testing borrowers’ affordability and At Savills we are forecasting average n 2014 the total value of housing introducing loan-to-income caps at a lender house price growth across the UK of stock in the United Kingdom rose by level, these regulations will effectively put a just 2 per cent in 2015, with no growth £543bn to a whopping £5.75 trillion, ceiling on the number of people able to get a anticipated in London. Over five years the a sum equivalent to the combined mortgage and the size of mortgage available average UK house price growth is expected Gross Domestic Product of Germany, to those who can. to be almost double that seen across the IFrance and Italy. However impressive (or In due course, the impact of these capital, at just shy of 20 per cent. frightening) this statistic, it hides the fact that regulations will dwarf any effect from the While this may not particularly excite 2014 was a year of two halves: a first half of changes to stamp duty introduced in the investors and homeowners it should limit sentiment-fuelled price growth, the second a autumn statement, however welcome (and the prospect of debt-driven parts of the period of regulation-induced sobriety. overdue) they may have been. market overheating in the future. Nowhere was this more evident than This is likely to mean that the “new It is also likely to mean that access to in London, where the value of housing normal” for transactions in the housing home ownership remains constrained, stock has doubled in a decade so that it market will be some way below the long- causing more people to rent for longer. now accounts for a quarter of the total term pre-credit crunch average and will As such, the generational divide in the value of housing stock across the UK. That continue to be skewed in favour of cash housing market is likely to widen. The gap means the gap between values in London buyers and those with a healthy chunk of between baby-boomers (who benefited and the rest of the country has reached existing equity. from the growth in home ownership in an unprecedented level, leaving London In the past seven years market forces the second half of the 20th century) and looking expensive. have driven this change. Going forward, Generation Y (who face 21st century Lead indicators of demand, though, such the regulation is likely to mean it becomes difficulties in getting on the housing 10 INVESTING IN UNCERTAIN TIMES PROSPECT MARCH 2015

ladder) is set to widen. Even so, we would expect the investment on the housing ladder and investors have The corresponding increase in demand focus for this group to shift away from embraced the security of a bricks and mortar for rented accommodation suggests that prospective capital growth and towards the investment. Even though patterns of price there will still be investment opportunities income returns which an investment in growth will change in the next five years, all for those with the purchasing power to housing yields. of the indications are that the private rented expand their property horizons. This is Over the past five years, the total value sector will continue to grow over this period— particularly likely to be the case beyond the of housing in the private rented sector has potentially by as many as 1.2m households. capital, where the capacity for medium- grown by 57 per cent to over £1.1 trillion, Lucian Cook is Director of Residential term house price growth is greatest. as first time buyers have struggled to get Research at Savills What can I get tax-free?

With interest rates so for you alone, not the Inland Revenue. Far Another option to shelter funds from the better to nab these meagre rates than pay taxman is to give away money to offspring— low, tax-free savings income tax on funds held in a traditional cash and fixed-interest funds in the Junior are more important (and similarly ungenerously-rated) savings ISA are tax-free and the limit before 5th April account. is £4,000—or saving with the government- than ever That’s one reason why now is also a good backed NS&I. Its index-linked certificates Lucy Tobin time to do some old-ISA housekeeping: cash only occasionally go on the market, but stashed away in previous years should be put Premium Bonds are always tax-free. ver since the Bank of England to work just like this year’s allowances. Never Then there’s pensions: individuals base rate has been languishing withdraw old ISA funds to re-invest in a new currently receive a tax-free allowance worth at its record low of 0.5 per cent, account—you’ll lose the tax-free wrapper. up to £40,000 and can carry forward up to finding tax-free places to put away Instead, you’ll need to ask the institution you the past three years’ unused allowances too. cash has been a crucial boost want to switch to to carry out a transfer and For those willing to bear more risky Eto returns. investments and their resultant sleepless And this year, since the spectre of the “After years of no-returns, nights for potentially-higher returns and general election in May means the tax possibly having more fun with your money, rule book could be ripped up once more, 208 out of the 2011 cash schemes like Enterprise Investment Schemes anyone who can afford to capitalise on ISAs on the market (EIS) and Venture Capital Trusts (VCT) are current reliefs should do so soon. worth pondering. That’s why the banks also get so currently pay out inflation- They provide tax relief of 30 per cent and titilated about this time of year, plastering beating levels of interest” tax-free gains, and allow you to invest up to buses with adverts about their paltry- £200,000 (VCT) or £1m (EIS) in some of the rate Individual Savings Accounts (ISAs) safely move the money on your behalf. Don’t UK’s most entrepreneurial and vibrant—and as if their interest rates—which currently accept the first deal offered by your high risky—small companies. stand at an average 1.45 per cent—are street bank: some big names pay out just 0.1 Be careful where you put your money, but something to get excited about. per cent on balances, meaning putting in this in this ungenerous financial world tax-free Unfortunately, if you’re after a tax- year’s entire allowance would earn only £15 investments are more important than ever. free savings product where your money is interest over the year. Lucy Tobin is a personal finance journalist guaranteed to be safe, cash ISAs are the The new freeing-up of ISAs—when the and columnist for the Evening Standard best option around. The allowance is at government last summer decided that Britons least substantially more generous this year: are big enough to decide what to do with individuals can now save up to £15,000. their money—also means that investors can The vast minority do not: two-thirds gamble all, none or any proportion of the of British adults, or 33m people, have £15,000 allowance on the stock market or in neglected to save or invest any money funds inside a tax-free wrapper. into ISAs this year, according to Axa Self Analysis by the fund manager Fidelity Investor, an investment ISA firm. proposes that even if you’ve never invested That remains the case even though in a stocks and shares ISA but begin to do so inflation’s fall to 0.5 per cent in January today, you could be a millionaire within 25 means it is now far easier to find an ISA years. That supposes investing the maximum that beats the effect of rising prices. After cash each year with investments growing at years of no-returns, 208 out of the 211 5 per cent each year—quite a supposition: cash ISAs on the market currently pay out the nature of investing means you could lose inflation-beating levels of interest. all your cash. Sure, the rates still aren’t exactly But if you do go down this route, be sure generous, but if you hold a cash ISA in an to do so in the cheapest possible way. Opt for institution covered by the government’s the most inexpensive platform, such as a DIY £85,000 savings guarantee, your money investment website, and you’ll cut out some is at least secure and generating a return of the fees that erode your rewards.

2 INVESTING IN UNCERTAIN TIMES MARCH 2015 MARCH 2015 INVESTING IN UNCERTAIN TIMES 3 12 INVESTING IN UNCERTAIN TIMES PROSPECT MARCH 2015

The euro falls against the dollar around the Greek election Interest rates (%) Greece’s public debt is more than UK US Fed Funds Rate 1.25 6 % 5 175 OF GDP 4 the highest within the eurozone 1.20 3

2

1 Oil prices have more than halved since June 2014, falling to their 0 1.15 Jan Jan Jan Jan Jan lowest level since 2006 2008 2010 2012 2014 Source: Trading Economics

1.10 The Swiss franc surges against the euro in January 2009 Dec 29 Jan 5 Jan 12 Jan 19 Jan 26 after abandoning its currency peg Source: xe.com 1.05

1.00 Inflation rates, % (CPI) 0.95

10 0.90

0.85

0.80 8 Dec 29 Jan 5 Jan 12 Jan 19 Jan 26 Source: xe.com

6 6

4 4

2 2

0 0

–1 –1 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: World Bank World UK US Eurozone 2 INVESTING IN UNCERTAIN TIMES MARCH 2015 MARCH 2015 INVESTING IN UNCERTAIN TIMES 3 PROSPECT MARCH 2015 INVESTING IN UNCERTAIN TIMES 13

The euro falls against the dollar around the Greek election Interest rates (%) UK US Fed Funds Rate People in the UK owed a total of 1.25 6 5 4 1.463 1.20 3 £ trillion 2 at the end of November 2014— an average of £28,968 per person 1

0 1.15 Jan Jan Jan Jan Jan 2006 2008 2010 2012 2014 Source: Trading Economics

1.10 The Swiss franc surges against the euro in January Dec 29 Jan 5 Jan 12 Jan 19 Jan 26 after abandoning its currency peg Source: xe.com 1.05

1.00 Inflation rates, % (CPI) 0.95

10 0.90

0.85

0.80 8 Dec 29 Jan 5 Jan 12 Jan 19 Jan 26 Source: xe.com

6 6

4 4

2 2

0 0

–1 –1 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: World Bank World UK US Eurozone 14 INVESTING IN UNCERTAIN TIMES PROSPECT MARCH 2015 Prepare your finances for the election

Financial markets Ladbrokes and William Hill have declined allowances, making sure you’ve used your hate uncertainty, sharply since the Budget last year. Back capital gains tax allowance and perhaps then, Chancellor George Osborne introduced most importantly making the most of which could be a higher tax rate for fixed-odds gaming pension tax relief. an issue this year machines. Things could get even worse with “Labour are pushing for tax relief to be Labour threatening to introduce a new tax on cut to 45 per cent for taxpayers, the Lib Ruth Jackson all sports betting. Dems are edging towards a flat rate of 25 Another sector that may suffer is utility per cent and the Tories are very deliberately t is an election year in the United firms. While many have announced price keeping quiet but the word is that they too Kingdom and in just a few months’ time cuts as a result of the falling oil price, the are actively looking at ways to cut relief,” the nation will head to the polls. It is going cuts are small and not coming in for months. says Cox. If you are a higher or additional to be an incredibly tight contest, with There is a good chance all parties might rate taxpayer you should take full advantage many experts predicting that we could take aim at high energy bills as part of their of pension tax relief before the election. Ihave a hung parliament, resulting in another election manifestos. coalition government. Housing market What does all this mean for your Taxes After a few years of strong growth the finances? You should also be prepared for tax rises. housing market could falter as a result “History tells us that despite what the of the election. A Conservative win is Investments parties tell us before an election, taxes rise likely to result in a market that continues UK election results don’t tend to cause immediately afterwards,” says Danny Cox, to grow; the past five years have shown seismic shifts in the financial markets but the a chartered financial planner at Hargreaves us that David Cameron and Osborne are old adage that the markets hate uncertainty Lansdown. “On this basis using tax shelters both prepared to take steps to keep house could be an issue this year. Such a close such as Individual Savings Accounts is prices rising. contest could see things get jittery in April important to reduce the income tax payable.” But with the Labour Party talking about and May. Taxes are certainly likely to play a key role bringing in a mansion tax on properties “Historically, the UK market has been in the political promises that come pouring worth over £2m, price growth could stall in somewhat apolitical when it comes to who out before the election. Labour is already areas like London where many people may wins,” says Mark Wharrier co-manager of saying it will reverse the Conservative Party’s put off moving in order to see what happens the BlackRock UK Income Fund. “That said, tax cuts for millionaires and is threatening a with property taxes. we continue to recognise elevated risk levels mansion tax on houses worth over £2m. The in politically sensitive sectors, notably utilities Liberal Democrats also back a mansion tax. Cash and gambling.” Making your finances as tax efficient Interest rates are not expected to rise until Gambling could suffer as a result of as possible should be a key aim ahead of late 2015 at the earliest, and even this the election. Shares in listed bookmakers the election. This means using up your ISA looks increasingly unlikely as inflation remains incredibly low. This means that interest rates on savings accounts are unlikely to rise any time soon. The outlook for anyone keeping savings in cash will remain much the same regardless of the election. You need to keep your nose to the ground in the hunt for the best possible rates, and consider taking on more risk and looking to the stock market if you want to improve your returns. One area where the election could have an impact, though, is exchange rates. The pound is currently enjoying an incredible period of strength against the euro. This is thanks to, among other things, quantitative easing in the eurozone and the Greek crisis. But a tightly fought election resulting in a possible hung parliament and the uncertainty that brings could cause the pound to tumble. If you’re planning a holiday later in the year, now might be the time to buy your currency. Ruth Jackson is a journalist and former “Despite what the parties say, history tells us that taxes rise immediately after an election” Deputy Editor of Moneywise magazine This advertisement has been approved for issue in the United Kingdom by Pictet Asset Management Limited, authorised and regulated by the Financial Conduct Authority. The value of an investment can go down as well as up, and investors may not get back the full amount invested.

Stability is the mother of

Asset Management Management Asset Services innovation.

Geneva Lausanne Zurich Basel Luxembourg London Amsterdam Brussels Paris Frankfurt Munich Madrid Barcelona Turin Milan Florence Rome Tel Aviv Dubai Nassau Montreal Hong Kong Singapore Taipei Osaka Tokyo www.pictet.com