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Download a Pdf of the Supplement 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 interest 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 United States 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 European Union 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. China 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 money. 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. Inflation- “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 euro—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 central bank 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 Federal Reserve 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 European Central Bank’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/INTIMENEWS/ATHENA © 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.
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