Finally, we have an election which will make a difference, with clear blue water between the parties. Private clients take note, says Freddy Barker
REAL CHOICE IS a good thing. In May, we will be asked to choose between a Conservative party which believes that corporation tax cuts are the best way to resuscitate the economy and a Labour party which believes that Keynesian-style spending increases are the only way. Too often these days politics is a matter of differing management styles. This election will be marked out as a battle of ideologies.
It is a contest long overdue. After the champagne-soaked excesses of the new millennium, the economy is suffering an almighty hangover. In a desperate attempt to ease the pain, the Bank of England has printed £200 billion of new money, the MPC has cut interest rates to a 315-year low and the government has borrowed more for the next two years than all its predecessors put together.
Yet rescue is still far off. Britain was one of the last countries in the G20 to break out of recession and Brown’s lot are the first government in 40 years to see GDP per capita fall during their time in office.
This is no time for defeatism, though. ‘Britain has been to the edge before. But by some miraculous self-correcting mechanism we always seem to step back at the last moment,’ Lord Deedes was fond of informing his leader writers at The Daily Telegraph.
A pertinent example is 1945, when our economy was so ravaged by six years of total war that Keynes described it as ‘virtually bankrupt’ and added that ‘the economic basis for the hopes of the people [is] non-existent’. The free-spending economist was packed off to America to secure a life-saving loan so large that it was only finally paid off in 2006.
So as Britain stares into the abyss, we should ask: just who is likely to be dictating policy from Number Ten this summer? And what should private clients do to navigate the changes ahead?
High-level sentiment in the City is that a Labour victory would result in a sterling crisis. ‘Whereas if the Conservatives win, the chaps are ready to give them a year to sort things out,’ one of Britain’s senior hedge-funders assures me.
So can Cameron do it? Despite endorsements from The Sun and other tentacles of the Murdoch empire, victory will not be easy. To win, the Conservatives must secure one of the three biggest electoral swings since 1945 — seven per cent — bigger even than Margaret Thatcher’s 1979 victory after the Winter of Discontent.
The constituency boundaries are against them too. In 2005 the Tories polled 41,983 votes for every seat taken compared to Labour’s 28,111. The borders have since been withdrawn but they still favour Labour as they over-weight Scotland and Wales.
IF THEN, AS seems perfectly possible, the Tories fail to win a clear majority, the word from the Houses of Parliament is that Cameron must make Vince Cable the Chancellor and (more surprisingly) Sir Menzies Campbell the defence secretary if he is to occupy Number Ten. For all Nick Clegg’s high-minded rhetoric on the cost of Liberal support (electoral reform, more money for education, a greener economy and tax relief for the poor), it is not policy but position that matters to the party.
As for policy, a Conservative government or a Con–Lib Dem alliance would introduce an emergency budget within 50 days of the general election. With gilts resting on ‘a bed of nitroglycerine’ in the words of Bill Gross, the world’s largest bond investor, dramatic change is inevitable.
‘The old model is unsustainable,’ reasons Chris Nevile of Principal Investment Management. ‘Can you have a society where people’s average debt increases every year? Can you have a social system whose cost grows exponentially?
Can you have guaranteed public-sector pensions when private-sector pensions are suffering attrition by government tax policies?’
He is supported by Robert Candler of HSBC Investment Management, who summarises: ‘People are heavily in debt, companies are heavily in debt and the country is heavily in debt; that will need to be addressed.’ He forecasts ‘drastic changes’ in policy, which will reduce debt but also ‘probably slow down consumer spending, meaning there is quite a high possibility of a double dip recession’.
With problems multiplying, Lee Robertson of Investment Quorum predicts that the Tories may kitchen-sink it — expose all the nasties at once and start afresh. ‘There is a possibility that the Tories might let the sovereign credit rating go and blame Labour,’ he argues, foreseeing poor reaction on the markets when the full truth about our economic woes comes out.
HNWs need to be alert. John Howard-Smith, founder of PSigma Investment Management, warns: ‘Be nimble because we are going to have volatility this year.’ He reasons that buy-and-hold strategies no longer work because we’ve had two declines of 40 per cent or more in the past decade, whereas there were only two in the entire 20th century. Volatility is the new normal. So Howard-Smith advocates: ‘Be flexible in your asset allocation. Having active fund managers is likely to benefit people this year.’
More price fluctuations will cause HNWs considerable unease on the back of a lost decade in the equity markets. Stephen Vakil of Quilter believes, however, that investors should not be derailed by short-term movements. ‘Be consistent, always have an eye on what your plan is and don’t be sidetracked,’ he advises. ‘So if you do not need your money for, say, ten years, take that view. If there’s one thing investors should learn from the last few years it is that provided you are properly invested, you will recover.’
IT IS ALL the more important in this context to keep in touch with your wealth manager. You may loathe him for selling you that pile of structured products but, as John Howard-Smith explains, you must keep the lines of communication open. ‘Make sure that you understand what your investment managers are trying to achieve with your money and that your investment managers understand what you want them to achieve with your money.
‘That may sound like a blindingly obvious statement, but time and time again it doesn’t happen. Too often there is a massive mismatch between client expectations and what some people in their ivory towers think that their clients want.’
One way of finding out whether your wealth manager is taking the appropriate action is getting third-party advice. As John Maitland at Baring Asset Management elaborates: ‘I would urge clients to look at their investments and get independent advice on whether this is the most efficient way to achieve their objectives. If the answer is “yes” then that’s great; if it’s “no” then they should think about how else they potentially could do it.’ An array of private client consultants exist to meet this need and are happy to help strapped-for-time HNWs.