Raise a glass to some quick-fix tonics

“The older you get, the longer it takes to recover.” So cautioned a former colleague – a fellow survivor of the last recession in financial publishing – as we contemplated a credit crunch-induced move from a cheap and cheerful Viognier to the more acidic upper reaches of the wine list, just before last orders.

Proper oenophiles, such as the FT’s John Stimfig, would point to my subsequent two-day headache as evidence of the false economy in this, and recommend an “investment- grade” vintage. But we didn’t have the money, or the time. It’s a feeling that older investors can probably relate to.

In fact, as they stare into pension pots that are almost literally half empty (given the 45 per cent fall in the FTSE 100 index since October 2007) or almost certainly in deficit (given this week’s Pension Protection Fund figures showing that 91 per cent of final salary schemes have a shortfall), late 50-something investors must feel they’re in the last chance saloon.

There just isn’t enough time for equity markets and property prices to recover, to top up their funds before they retire. Judging by the latest forecasts, they could do with a large drink.

Invesco’s chief economist, John Greenwood, warns that the current recession will not be like a typical post-war recession, in which recovery can follow quickly once inflation and interest rates subside.

Instead, this recession bears more resemblance to the “debt deflation” recessions identified by the US economist Irving Fisher. In these, a desire to reduce debt leads to forced asset sales, falling asset prices and deflationary pressures. This deleveraging process can be protracted, points out Greenwood. After the bursting of the late 80s housing bubble, it took nine years for debt-to-income ratios to fall from a peak of 115 per cent to a “low” of 102 per cent in early 1998. As he puts it: “Household balance sheet repair takes a long time.”

Central banks can try to provide liquidity to the banking system but, as long as deleveraging by the private sector continues, it won’t do much good. That has implications for asset prices, says Greenwood. “If the private sector dominates, strategies that emphasise cash and safe bonds will do best, while risk assets will be under pressure.” But what use are “cash and safe bonds” yielding 1 or 2 per cent?

Ignis Asset Management fund manager David Clark also warns us to “beware false dawns” in equity markets. “Investors should not to read too much into low valuations,” he says. “I’d be very surprised if we didn’t see further dips in Q2 and Q3.” That’s
the last thing long-only pension funds need.

Rowan & Co’s head of research, Tim Cockerill, is talking decades. “The economic landscape for the next 10 years will be different from that of the past 10. Investors will be more cautious and there won’t be the funds available for a lot of enterprises. It seems there isn’t any great hurry to invest.” Unless, that is, you’re due to retire in five years.

FT columnist Wolfgang Münchau doesn’t even put a time limit on it. He predicts an “L-shaped recession, that starts with a steep decline, followed by very low growth for many years”. He suggests we are only in the vertical part of the L, before reminding us that “the horizontal bit is the scariest”. Closer to retirement, you want to be closer to the end of the alphabet – seeing a U or V-shaped recovery.

What older investors need is a fast-acting “pick me up”. Fortunately, a few remedies are available, to those that can stomach the risk.

Société Générale offers “accelerated” trackers, which can speed up the profits from falling, and rising, equity prices. Its Global Index Bear Accelerator (SN01) produces gains equivalent to eight times the fall in the FTSE 100, S&P 500, or DJ Eurostoxx 50 indices. Conversely, its FTSE 100 Double Upside Accelerator (SG78) returns twice the rise in the FTSE 100. But neither is fully capital protected, so they require a clear head.

Scottish Widows’ latest 100 per cent capital-protected product, offering 150 per cent of any rise in the FTSE 100, may prove more palatable while markets are volatile – and then deliver a lift towards the end of its six-year term. Similarly, Barclays Wealth’s latest Super Tracker may appeal to those who want protection against 50 per cent FTSE falls in the short term, but four times any recovery over the next five years. According to Barclays’ “stress testing”, the product has a 28 per cent chance of maximising the outcome, and only an 8 per cent chance of going into the red . . . rather like my more sensible wine-drinking partner.

matthew.vincent@ft.com