Going Green & Other Finance News

Posted on: 20 May 2008 by Gareth Hargreaves

This week's finance news including ethical investment, tax, pensions and care funding, with Graham Kerner.

The coming week is the nation's first ever National Ethical Investment Week, when MPs et al will be trying to persuade us to invest in good causes.

But as The Financial Times commented, investing in ethical or green funds, where managers employ a positive screening approach to companies they buy, hasn't looked a terribly clever thing to do, with most losing on average 8.7 per cent this year.

Over the longer term this type of fund has, said the paper, been a worthwhile investment and helps people match their investment strategies with their principles. The reason for the disparity in performance of the sector is down to stock-picking skills - for example, large cap companies have done well this year so a portfolio might include a traditional energy company if it is expanding its renewable investment. This approach has led to some good performance even though market conditions have been difficult, illustrating that going green doesn't necessarily mean you have to forego profit on your investment.

The paper ranked the St. James's Place Ethical fund first this year and third in the sector over the five-year period.

Those Halcyon Days

A few, no doubt carefully chosen, words set the scene for the UK last week when the governor of the Bank of England (BoE) Mervyn King said, "For the time being, at least, the nice decade is behind us."

The BoE's latest inflation survey told everyone what they probably already knew - that the outlook for inflation is not too good with rising energy and food costs gradually taking their toll on the average British household. AsThe Independent reported, the governor indicated inflation could rise further, restricting still more the Bank's ability to reduce interest rates to deal with the threat of an economic slowdown.

Commenting on heightened predictions of more price increases, Mr. King said, "There is considerable uncertainty . . . because it rests on assumptions about the magnitude and timing of further rises. Nevertheless, it is likely that with inflation above 3 per cent for several quarters, I will be required to write a number of open letters to the Chancellor over the year."

The governor's comments coincided with news that UK inflation rose at an annual rate of 3 per cent last month - up from 2.5 per cent in March and way ahead of expectations, according to The Financial Times. The data came hard on the heels of strong producer price data - implying a rise in factory prices in the months ahead - and downbeat surveys on UK retail sales and housing: 95 per cent of Royal Institution of Chartered Surveyors' valuers reported lower prices last month. Britain's increasingly beleaguered housing market was hit by yet more bad news as mortgage providers said lending to homebuyers had fallen to a 33-year low.

Against this rather uninspiring backdrop of weakening economic activity and higher inflation it was no real surprise that another casualty would be sterling, which fell against both the euro and US dollar - despite the likelihood that interest rates are unlikely to be cut in the immediate future. Fortunately there are some winners in the form of exporters who are finding their products more competitive against their rivals.

Away from the UK, there was mixed news on the world's two largest economies - America and Japan, with the latter's economy growing by just 1 per cent in the first quarter of the year - its slowest rate for three years - despite strong exports to China and other emerging markets.

In contrast, it appears that the American consumer is defying predictions of a slowdown, as the latest news from the shopping malls showed that retail sales figures for April were stronger than expected with consumers spending more on things they wanted rather than what they needed. The latest figures indicate that Americans are responding to high petrol prices by eschewing gas-guzzlers and diverting money to spend on furniture and DIY materials. There was also a surprise fall in US inflation, which ticked lower last month giving some respite to the Federal Reserve, which has predicted that weaker economic growth will help cool prices.

Markets Confound

The Sunday Times summed up events by saying it was "the week the wheels came off" the economy, with house prices falling, surging inflation and the government panicked into a mini-budget. Can it get worse the paper asked its readers?

Well, all things considered, the stock market is taking a very sanguine view of events and, as The Sunday Telegraph observed, investors may soon see the green shoots of recovery if the BoE's declaration that the worst of the credit crisis is over comes good. In its Financial Stability Report the Bank's deputy governor, Sir John Gieve, says “The most likely path ahead is that confidence and risk appetite will return”.

His views echo those of US Treasury Secretary Hank Paulson who also believes the worst is over. With credit market conditions improving - there was a sharp turnaround in sentiment last week as spreads narrowed substantially - investors' appetite for equities has been growing and last week global stock markets advanced strongly across the board.

In London the FTSE100 advanced one hundred points to close just above the 6,300 level and in New York the Dow Jones index rose 2 per cent. Tokyo led the way in the Far East with the Nikkei 225 index racing ahead 4 per cent - its strongest performance for some weeks - closely followed by Hong Kong. So are investors right to start becoming more optimistic?

Quietly Confident

John Hodson of THS Partners, who manage funds for St. James's Place, is quietly confident that whilst the UK economy might get a little worse in the short term there are reasons to be optimistic.

"Politicians and bankers understand the seriousness of the situation and are taking action and the banks are re-capitalising. There could be more casualties, but from past experience I think we are probably half way through. The economy is obviously slowing but we believe the consumer will hold up better than most think with an increase in discretionary income, even if growth is only 1 per cent.

"From an investment perspective, for us it is all about stock-picking, with a bias for those companies who derive the greater part of their earnings outside the UK. If we consider the UK index, there are many shares trading at the same price they were ten years ago but the environment now is different. Companies are less levered, more global growth orientated and globalisation generally has increased profit margins. Capital is more flexible and technology has improved. Markets and investors regularly become overly pessimistic as we have witnessed recently, but for us we see huge value in the UK with plenty of money-making opportunities."

The point about the market offering good value was highlighted in The Sunday Telegraph, which pointed out that back in 2000 the FTSE100 index traded on a price/earnings ratio - the price of a share as a multiple of the company's earnings - of 30.45 which then fell to 15.9 in March 2003 - the low of the equity bear market when the index touch 3,287. Today the ratio for the index is 11.8 suggesting that shares for the most part are cheap.

And as the paper went on to say, it is a little known fact that despite the recent gloom, six of the largest-ever one-day rises in the past 15 years have occurred this year, supporting the case for investors remaining invested and not trying to time the market. Research from Fidelity shows that £1,000 continuously invested over the last 15 years would be worth £3,500 today but if you had missed the best two or three days in each of those years - or the 40 in which it rose most - then your investment would have been little changed on the period.

That's A Relief

The Chancellor's emergency Budget last week - necessitated by the abolition of the 10p tax-band - may have meant a small windfall for many, but the sting in the tail was that it will push 150,000 more people into the top-rate tax net. As The Daily Telegraph explained, the £600 increase in the personal allowance was offset by a reduction in the higher rate tax threshold to £40,835 meaning more people will now enter the higher band.

On the bright side, The Financial Times pointed out that, as a consequence of the changes, those affected can claim greater tax relief on their pension contributions, so now is a good time to review one's financial affairs and retirement strategy.

Plan for the Long Term

One issue discussed in the broadsheets is one that many people fear: having to sell the family home to fund long-term care costs. Under the English system, anyone with savings or capital of more than £22,250 is required to pay for their own care, which can be hugely expensive. A survey by Saga showed the average cost of a four-year stay in a care home will double to £223,476 in the next 20 years. If you own your own home then it might have to be sold to fund fees - the situation is different for married couples, but could result in the local authority taking a charge on half the property.

There is, however, a simple solution that, providing it is in place before care is needed - the deprivation of capital rules exist to stop people effecting arrangements once it is clear that care is needed - and that is to use a trust. As the paper said, the use of a discretionary trust, for example, means that the transfer of ownership of a property into trust means it should be disregarded when local authorities assess how much you can afford to pay towards long-term care costs.

19th May 2008

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