China crisis hits UK savers' pockets

Posted on: 15 September 2015 by Steve Wanless

Steve Wanless looks at how UK pensions and ISAs suffered as a result of financial uncertainty in previously booming China.

financial woes in China affect UK savers

“JUST when you thought it was safe to go back into the water” was the tag used when Jaws 2 was released three years after the original 1975 Hollywood blockbuster.

Many investors are feeling the same way at the moment after the first serious stock market crisis since the financial collapse and recession of 2008.

As with every crisis, the warning signs were there, but few thought the problems in China, which has been leading the global economic recovery, would have such an impact worldwide.

Talk of a rate rise has now been put on the back-burner; the uncertainty and huge stock market losses have impacted on everyone with shares held in ISAs and pensions.

It is a stark reminder that the UK is not an island financially. Politicians here are putting a brave face on events, but admit that the situation is largely out of our hands.

The Chinese government has learnt that the hard way; various measures to stem the losses, such as lowering interest rates, making borrowing easier and devaluing the yuan, have had very little effect and in some ways probably helped increase the panic.

Doom, gloom and pragmatism

Some newspapers think they can do better. The Daily Mail’s front page headlined: “Money Mail’s definite survival guide to the stock market crisis”. The Times took a less aggressive stance: “Why you should stay calm amid the global stock market rout.”

On one day towards the end of August, more than $1 trillion (a million million) was wiped off the value of companies worldwide. Companies in the FTSE 100 lost £74 billion that day, which was the tenth day in a row that the index had fallen.

The UK’s Chancellor of the Exchequer, George Osborne, admitted: “Britain is a very open economy; we’re probably the most open of the world’s largest economies.

“And so we are affected by what happens, whether it is problems in the Eurozone, problems in the Asian financial markets.”

The dreamy days of April when the FTSE 100 achieved a new record of over 7,100 suddenly seemed a long way away as it dipped below the 6,000 mark.

It’s true that the majority of us are not as wealthy as we were when we entered the month of August. There might have been a slight increase in the house price, but that will have been offset by a reduction in our pension pot and ISA and other savings held in stocks and shares.

Varied investment strategy

We invest to see our money grow, but it is in these turbulent times that the expert specialist advice of an Independent Financial Adviser (IFA) can be more valuable.

The wisdom of not putting all your eggs in one basket, spreading the risk and keeping some of your investments in cash or easily accessible comes to the fore in times like this.

No-one wants to be forced to sell assets or cash-in investments cheap just to get through the bad times. When the market keeps dropping some analysts believe there are share bargains to be had, but that is an area for those with a strong nerve, the speculator, the brave and the expert – and probably not for you and me!

As Clint Eastwood reminded us many times as Inspector Harry Callaghan in the “Dirty Harry” series – “a man’s got to know his limitations”.

Failing to learn the lessons of the past

One man with real nerve has always been George Soros, the Hungarian-born American business magnate, who has just celebrated his 85th birthday. Soros will be forever known as the “The Man who Broke the Bank of England.”

His most famous hour (or day) came on 16th September 1992, otherwise known as “Black Wednesday”, the day the British Government were forced to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM).

Just like the Chinese, John Major’s government thought they could control the markets and pumped billions into trying to keep the pound above its lower limit in the ERM. As well as the money, UK interest rates were raised twice that day from 10% to 12% and then to 15%.

It was all in vain; that evening the chancellor, Norman Lamont announced that Britain was leaving the ERM and rates were going back to 12% (they returned to 10% the next day).

Soros’s Quantum Fund had begun selling pounds on the evening of the 15th. Unfortunately for the politicians, the ERM stated that the Bank of England was required to accept any offers to sell pounds. To compensate this, PM Major ordered the spending of billions worth of foreign currency reserves to buy up the sterling being sold!

The Treasury took the decision to defend sterling, rather than to devalue because of the risk of inflation. It was a costly error of judgment.

Soros made over £1bn, while the Treasury (in 1997) estimated the cost to the country was £3.4bn, though other sources estimated it much higher.

The trading losses in August and September were £800m. The real cost was selling the foreign currency; had it been kept and the pound devalued, the UK would have made £2.4bn profit!

Like all crisis, it’s much easier to understand when looking back with the help of the passage of time and the real facts about what had gone on; and who exactly were the winners and losers. This latest China-induced stock market turmoil is likely to be no different.

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