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These are dull and difficult markets for savers. Sometimes as an investor you just need to ignore the noise and the short-term gyrations and concentrate on the most likely outcome in the longer term. This year has seen a mini collapse of share prices, followed by a decent rally, leaving funds struggling to make a positive return.
UK commentary is currently besotted by the EU referendum. The markets, which had assumed an easy win for Remain, are now having second thoughts as the polls and bookies’ odds move more in favour of Leave.
I have heard much noise but seen little hard fact that makes me think Brexit will be an important influence on the world economy either way. As the chances of the UK leaving have increased, longer-term UK interest rates have continued to fall, while sterling has rallied a bit from the lows against the dollar in February, only to wobble again.
Many investment commentators are betting on weaker sterling if we leave, which will help overseas holdings in portfolios and should boost UK exports a bit. I do not believe the wilder pessimistic forecasts that leaving would do big damage to EU/UK trade and remember — when we helped create the rules and regulations of the single market there was no surge upwards in UK growth as some had forecast.
My mantra for many months has been simple. Interest rates will stay lower for longer in the advanced world. So far that has been true. Yet daily commentators and traders worry or get excited over the possibility of US interest rate rises and the knock on effect that could have on UK rates.
It seems to me unlikely that Janet Yellen, chair of the Fed, will want to raise rates provocatively in an election year when she and many others like her probably want to do all they can to support the modest recovery. They also wish to avoid global troubles from too strong a dollar, which hits commodity prices and emerging countries with dollar debts. Many in the US establishment will also wish to help the president and Hillary Clinton, the Democratic Party candidate.
Mark Carney, the governor of the Bank of England has given up all his talk of likely prompts for rate rises. “Forward guidance” that they could come when unemployment fell below 7 per cent was superseded by hints of rate rises when real wages rose. This was replaced with a prophecy that the turn of 2016 was an important time. None of these triggers were pressed to overturn the imperative to keep rates on the floor. It turned out that Mr Carney’s own hinted predictions of higher rates ran ahead of events. Now he is promising more liquidity and even lower rates if the public does vote for Brexit, and there is some worry in markets as a result.
This means it is not worthwhile for long-term savers to keep money on deposit. People have to take more risk to get a return. This means I have strengthened the bond part of the FT portfolio. Bonds are very dear, but all the time rates remain on the floor and the Japanese and European central banks scramble to buy them, you can make a return by buying bonds that repay at later dates or by buying higher-yielding corporate debts in companies that can repay. I will not buy bonds offering negative yields as that does seem absurd.
It also means you should also be able to make a modest real return from shares. We have had the best gains from the early days of this long recovery period from 2009, but dividend yields are mainly higher than good quality bond yields, and there is some growth in dividends to be had.
My biggest worry in the portfolio has been the holding in European shares. This was a fashionable place to invest a year or so ago. Many looked forward to some earnings growth as the eurozone economy started to recover. The weaker euro, partly brought about by printing so many of them, would flatter profits from overseas earnings. The large official purchases of bonds made it likely the sellers of those bonds would use the money to buy some shares instead.
It worked for a bit, but this year European shares have been poor. The fund has just 6 per cent in Europe, as I have been worried by rising political risk. Popular revolts against the traditional governing parties are now common. Spain and Ireland are unable to form governments. Greek politics have been transformed by the rise of Syriza and the complete collapse of the traditional centre left governing party, Pasok. Even in Germany the main centre left and centre right parties have to govern in grand coalition, which is now damaging the SPD badly in the polls as a Eurosceptic alternative rises. Brexit would force the richer remaining countries in the EU to make larger financial contributions to replace the lost UK money and cause some disruption to the political architecture of the Union.
I did not sell all the European shares in the hope that the quantitative easing money will boost values of financial assets, and the fitful recovery would continue. The German economy is still performing well and has successful companies with world brands that generate a large trade surplus. I thought it likely there would be a friendly settlement of the Greek debt problems this time ahead of the UK vote, as has turned out to be the case. The Greek — and other debt problems — are not resolved but they are parked for a bit. European bank shares have been a source of major weakness, as the regulator presses them to lend less and raise more capital. Their bad loan positions still cause worries.
Once the UK referendum is out of the way, the eurozone can press on more purposefully with its wish to strengthen banking union, develop political union, and create a strong fiscal discipline across the whole area. There are hints in the recent Greek deal that in due course some of the big country debt overhang will be effectively cancelled, getting them closer to sending money from the rich areas to the poorer areas as you need to do in a successful currency union.
While we are waiting for all this to happen, the FT portfolio has made good returns on US technology and on commercial property in developed markets, two areas I still like a lot. Overall world growth is pedestrian and large swaths of traditional industry and commodities have been under the cosh. Meanwhile the new digital and communications economy is growing quickly, is exciting, and offers share investors something to get enthusiastic about. I have just introduced a position in a general commodity fund, after a long period of avoiding commodities during the long bear market. I am becoming more interested as we see cuts in capacity and some signs of prices bottoming out.
John Redwood is chief global strategist for Charles Stanley. The contents of this article are for general information only and do not constitute investment advice. email@example.com
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