Inflation, Brexit-proofing your portfolio and investing in Germany
FT Money Show presenter Claer Barrett and guests discuss the rise in inflation, the best ways to Brexit-proof your investment portfolio. Finally they discuss how the Germans save and invest and whether we can learn anything from this in the UK.
Presented by Claer Barrett. Produced Lucy Warwick-Ching. Edited by Trixia Abao.
As inflation hits a five-year high, should we expect the first interest rate rise in more than a decade? The best ways to Brexit-proof your investment portfolio and the Germans. They save a lot, but according to Jonathan Neale, they don't necessarily save it well. Welcome to the Money Show, the FT's weekly podcast about personal finance and investing. I'm Claer Barrett, the FT money editor bringing you this week's money news.
The cost of living in the UK is on the rise. On Tuesday, consumer price inflation figures for the month of September hit 3%. That's the highest level in five years, putting pressure on the Bank of England to raise interest rates when they meet next month. But will they or won't they?
Joining me to discuss is Gavin Jackson, the FT's economics reporter. Welcome, Gavin.
Thank you Claer.
So inflation at 3%, does that mean a rate rise in November is looking near certain?
Well, I think it is. That they've pretty heavily committed to it now. And if they don't, I think the markets will be pretty disappointed and take a pretty dim view of Mark [INAUDIBLE], who famously called the unreliable boyfriend.
Oh, yes, that [INAUDIBLE].
For sending mixed signals in the past. So I think this time, they really have committed to it. And the 3% rise does give them the cover to do that now, to reverse some of the 9.25% cut they did last August. They can now take that back I think, because of the record high, sorry, the five year high inflation.
So inflation at 3%, we know it's inevitable that rates will have to rise at some point. But economists are now not looking at so much when the first rise will be, but what the second, the third, and the fourth might be. And they've got very different opinions about how far and how fast It might go as the cycle turns.
Yes, so I think everyone is pretty convinced that they will take back the 9.25% cut from before. But no one's yet sure about how far will go. Now most of the economists I've spoken to think inflation will peak either September or in October. [INAUDIBLE].
So we won't see it get much higher than 3%--
Which is the level it's running us at the moment.
So the fall in the pound last year after the EU referendum will be pretty much passed through to customers. And it doesn't look like there's much sign of any domestic inflation pressure from wages or other costs [INAUDIBLE] the economy yet. Now that might change.
The Bank of England estimates the long run equilibrium for the unemployment rate is 4.5%. Currently we have 4.3% unemployment. So if workers start to get more confident and demanding wage rises, then that could lead them to start increasing interest rates in the future.
But we've not had any wage growth for near a decade now. But I think people are starting to lose confidence they will ever come through. So it really depends on what's going on with that domestic inflation pressure. It's whether this will be one and done or will gradually go up next year.
So some people, including [INAUDIBLE] Colin Pickering, thinks that the markets could be under-pricing interest rate rise next year. If you look at where interest rates are in the market, they're thinking one in November and then one more in 2018. He thinks that after the first hike, the bank will step up their warnings that more will come in the future, because they won't be happy with what the market thinks at the moment.
But certainly for the next year at least, listeners to the podcast in Britain should expect a small rise of 9.25% in the very near term, and maybe another rise of the same amount in the year ahead?
Yeah, I think it will certainly be gradual when it actually comes, unless the data really changes and says that inflation is stepping up.
So in the meantime, let's look at the effect that rising inflation is going to have on UK consumers, as goods and services become more expensive, but real wages are effectively going backwards.
Yes, so data out last week from the real wages have gone down by about 9.4% in the last year, squeezing consumer spending. Now particularly prices have gone up for food and they've gone up for transport and they've gone up what the ONS, the Office for National Statistics called recreation and culture.
Now of those, I think food is really most notable. We've seen a 15% rise in butter prices over the last year, thanks to a European butter shortage. We've seen some 7.5% increase in the price of beer, which isn't great. And bad, even worse news for young man like me, video game prices have shot up recently, which is part of the reason why we hit a half decade high in inflation.
So the increase in interest rates won't do that much, that price rise will still have come through. It will hopefully dampen down a little bit of the price pressure in future. And much more, anyone with a mortgage will probably have to start paying more on that.
On the plus side, savings rates will increase. And savers haven't seen much in the way of interest in the last decade. But still, it's only going up to 9.5%. So it won't provide that much relief.
OK, Well thanks very much, to Gavin Jackson, the FT's economics correspondent. You can read our lead feature this weekend, "Are You Ready for a Rate Rise," in the money section of the FT weekend newspaper, or online from Friday at ft.com/money. We're hosting an "Ask Me Anything" event on the evening of Wednesday, October 25th with our US investment columnist, Ken Fisher of Fisher investments.
If you want to come, go to ft.com/kenfisherevent to get tickets. There's still a few available, which costs 35 pounds, including a glass of wine or two, if you're quick, and view full terms and conditions. How to Brexit-proof your investment portfolio is an enduring question.
And it's one that Maike Currie, investment director at Fidelity, has tackled in her FT money column this week. She joins me now in the studio to discuss. Welcome, Maike.
So you make the point that there are two things which are really weighing on investors' minds right now. Brexit and the bear. Let's touch on the latter. If investors are worried about a bear market looming around the corner, what can we do?
Yes, well it's fair to be worried about the end of the bull market. We've had a bull market for eight years running now. And investors are increasingly nervous about an impending correction. The short answer is, there's very little that you can do. Because the fact of the matter is, the initial stages or the final stages of the bull market are often the most profitable for investors.
So you don't want to take all your money off the table too soon. You could move some money into cash, but as I say, then you risk losing out. I think the most sensible option is to make a small allocation to cash in the name of capital preservation. And also, the old wisdom of keeping some powder dry to take advantage of any dips in the market.
Sure, so let's move on to Brexit and how investors compress Brexit-proof their portfolio. I know you've spoken to lots of fund managers in the course of writing this piece to find out what received wisdom of lots of people in the market. So talk through some of their strategies.
Yes, I'm quite fortunate in my day job. I get to meet fund managers from various different fund houses. And I think what's really interesting is that despite all of this uncertainty, they are finding some very attractive opportunities. Now the well-worn playbook has been in the wake of Brexit, to focus on those international earners that benefit from the weakness in sterling.
And we know that there're quite a few of those. They're mostly within the FTSE 100. But it's interesting to note, that lower down the market cap size, there are lots of opportunities, and I think a fund manager who's really capitalised on those opportunities is Dan Nickols of the Old Mutual UK Smaller Companies Fund.
I actually looked at some performance figures, and over the 10 years since the financial crisis, his fund is one of the top performers in the UK space. And he's looking at basically companies that can benefit from structural opportunities. And also industry consolidators. So companies that are scooping up smaller rivals. He's got holdings like Fever-Tree, which has been a fantastic investment.
[? Prefer ?] Conviviality, quite a few names in there.
What are other fund managers doing? I mean diversifying internationally is another theme.
They are diversifying internationally, and they're diversifying lower down the cap scale. Another manager that I speak to is Alastair Gunn of the Jupiter Distribution Funds. And he holds the Dominoes franchise DP Eurasia for Russia and Turkey. Now that might sound a little bit [? punchy. ?]
Of course, we know that Russia and Turkey comes of a lot of political risk. Another name that he holds is Global Ports Holding, which benefits from being one of the few companies that's listed. It's listed on the London Stock Exchange. That taps into the rising popularity of taking cruise holidays. And then, of course, the UK Housebuilders is another interesting area.
Well, I mean I have to say, I was in Madeira last week and it was just absolutely rammed full of cruise ships. And felt like the youngest person on the island.
Yes, the baby boomers are going on holiday. They like travelling.
They really are. I'll certainly have a look at that. But, yeah, the Housebuilders. Now the Housebuilders is quite an unusual choice. I mean, they seem to have had quite a strong since the Brexit vote.
They have had a strong run. And I think the investment case for the Housebuilders is a well recited one. The chronic under supply, the lack of a quick response from the government. The fact that Theresa May has thrown another 10 billion at the Help to Buy funding scheme. That's boosted the Housebuilders quite significantly.
But they are very exposed to falling house prices, to falling transaction volumes. If we do see a shortage of labour post-Brexit, that could leave them quite exposed. So an interesting alternative is an investment called PRS Real Estate Investment Trust.
A manager called Alexander Jackson, who runs the Rathbone Recovery Fund, soon to be renamed the Rathbone UK Opportunities Fund, has highlighted this investment to me, because this company really taps into generation rent, struggling to find places to rent because of this chronic shortage of housing in the UK.
They build homes near good schools to be rented by the private sector. And income hungry investors will be especially enticed by the very attractive yields they target of between 5% and 6%. That's another interesting one.
What they call multi-family housing in the US. Rental housing that is aimed at families rather than single people. Well, thank you very much there to Maike Currie. Let me stress that this has been a general discussion about investment. We're not recommending or endorsing any of the securities mentioned there. You can read Maike's column, "How to Brexit-proof your Portfolio" now on our website, ft.com/money or in Saturday's FT money section.
Now finally, the Germans have a legendary savings habit compared to the British. But what are they actually saving their money into? This was the question posed by Jonathan Eley, former money editor, now deputy editor of the FT's Lex column. After a recent stint reporting from Germany. And he joins me now to discuss. Welcome, Jonathan.
Hello, guten tag.
Guten tag. Well, when it comes to saving, how do the Germans and the Brits compare?
We are poles apart, so Brits save very low proportions of their household income. About 3%. In recent times it has actually gone negative. We're running down savings rather than accumulating them. The Germans, by contrast, save round about 10% of their household income.
And in Europe, only the virtuous Swedes and the smug Swiss manage better than that. The interesting thing though, is that that doesn't translate into net wealth. The European Central Bank compiles these statistics about net household wealth. And the average German household is actually slightly less wealthy than the average Greek household, which is a figure I think will probably surprise a lot of people.
It's partly down to the low levels of home ownership in Germany. But even when you include only those Germans who own their own homes, Germans are still only on average slightly better off than Italians.
Very interesting and surprising. But the savings products that the Germans are favouring, are they therefore, you know, quite rubbish?
No, yes, sorry, they are. This is the nub of the problem really. The Germans are very good at saving, as in putting money aside. But they're very, very bad at investing it. They're very, very risk averse. So they tend to favour products that basically trade off risk against return
At the moment, they're very heavily into cash, which as anyone will know, has been an appalling asset over the last 10 years. Even more so in Germany, because the sort of European Central Bank has negative deposit rates. And also, they've historically gone into things like life insurance policies, which again, it's a bit like a with profits kind of arrangement.
You pay in over 10 or 20 years, you get a guaranteed return at the end. The guaranteed return is provided typically by a zero coupon bond, a bit like a structured product in the UK. And again, the rates on those have been absolutely terrible, because of QE. So the returns on those have been very, very low. It's been a low yielding decade for German savers.
And how do the Brits fare better?
Well, of course, Brits are much more likely to be in the two asset classes that have done absolutely brilliantly out of quantitative easing, namely shares and property. The Germans, for various historical reasons, are very averse to both of those asset classes. They regard housing as a consumer good. A house is a place to live and it doesn't really much matter whether you own it yourself or whether somebody else owns it.
And Germans have also always been slightly suspicious of equities. German companies have tended historically to be bank financed and had very close relationships with banks. And equities are perceived as being a bit of a casino. And it doesn't help that while British privatisations got going in the mid 1980s, the very start of a long bull market in shares,--
German privatisations didn't really kick off until the late 1990s. With the result that many ordinary German investors bought shares right at the peak of the dotcom boom. There was a massive offering in July 2000 of shares in Deutsche Telekom, which was, it was was the BT moment in Germany.
What's the German equivalent of Tell Sid? Tell Wolfgang.
Tell Wolfgang, yes. And loads of retail investors bought 13 billion euros worth of shares at 66 euros each. And those shares are now worth 15 euros. Not surprisingly, German retail investors have a dim view of the stock market, which is a great shame. Because their index has tripled since the financial crisis. It's done far better than the FTSE 100.
Finally, when it comes to property, you were in Germany for several weeks over the summer reporting for the FT' and you said that you were meeting younger people over there who actually are saying now that they want to own a property, they're maybe catching the bug from Britain.
They definitely are. I think there's two things involved in that. First of all, they see that property prices are rising. For years and years, property prices in Germany went nowhere. In fact, they probably fell in real terms. But now they're going up.
And rents are going up as well. Even though rents are very strictly controlled in Germany, in the big cities like Munich, Frankfurt, like Berlin, where younger people are much more likely to live, rents are rising very rapidly. So they're seeing on the one hand, my living costs are going up.
And on the second hand, on the other hand, my money is earning next to nothing in the bank. And they're putting two and two together and saying, do you know what? I'm going to buy a house. And it's interesting that in Germany, younger people are more likely to be enthusiastic about owning a house than older people.
In Britain, of course, it's the other way around. Older people are far more likely to be homeowners than younger people.
Fascinating. Well, I'm really looking forward to giving your column a good read this weekend. Thanks very much there to Jonathan Neale. You can read "Why the Germans are good at saving, but they don't save it well" from Friday on ft.com/money and in this weekend's FT Weekend newspaper.
That's it from the FT Money Show. To get in touch with our team of financial experts, email us, firstname.lastname@example.org. Tweet us @ftmoney or on our [INAUDIBLE] online at ft.com/money. We'll be back next week at the usual time. Goodbye.