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A consumer&#39s view

If the analysts at Schroders who are predicting that the FTSE100 will not see 6,000 again before the end of the decade are right, then IFAs could be in for some lean years. Just as well that the recent report on their finances revealed that they are generally cash-rich.

Investors are on strike, not least of all because the majority are sitting on anything up to a 30 per cent loss if they bought in the tech share boom of the spring of 2000. Likewise, pension investors, particularly those nearing retirement, who have seen their pension funds devastated.

Throwing good money after bad is not something they are inclined to do. Indeed, reports of individuals discontinuing contributions to pension schemes, which are increasingly seen as a waste of money, are widespread. Selling new schemes will be difficult if the stockmarket climate does not improve.

Clients will take a lot of persuasion and reassurance to put a toe back into the water. So far, that reassurance has not been forthcoming.

It is not just the economic outlook that is the deterrent. With President Bush sabre-rattling and talking about a CIA hit-squad taking out Saddam Hussein, the global political scene is anything but stable. Admittedly, if the CIA&#39s attempts to assassinate Castro are anything to go by, this could easily degenerate into farce. But trouble could flare up between India and Pakistan while Israel and the Palestinians are still at each other&#39s throats. If all three troublespots erupt together, there could easily be a stockmarket meltdown.

As if this were not gloomy enough, there are long-term factors which could push us into a 1930s-like depression.

Although Europe and Japan are very different economies and have populations with very different characteristics, nobody has really exp-lained why the 15-year slump in the Japanese stockmarket could not be repeated here.

The most worrying similarity is that both northern Europe and Japan have an elderly population with an average age already well into the mid-50s.

Admittedly, Japan is a much more closed society. Europe enjoys, if that is the right word, a massive influx of young potential workers from Eastern Europe which will eventually bring the average age down. In addition, much of the stagnation of the Japanese economy is to do with the government&#39s refusal or inability to deal with the problems within the banks and other financial institutions, albeit, our own life companies are looking none too healthy with their annuity problems and falling solvency margins.

It may yet take decades for the employment market in Japan to loosen up and finally get rid of the jobs-for-life mentality and inject a little flexibility into the market.

But there are deflationary trends within Europe just as there have been in Japan. Nil interest rates has not prevented older Japanese couples from saving.

Indeed, with virtually no return on any investment, those saving for retirement realise they will need to save more and be prepared to spend capital when the time comes. The same could easily happen here.

Buoyant consumer spending in the UK and overheated house prices, which always lag a stockmarket downturn, have been the only thing which has masked what is in reality recession in the UK.

As soon as the expected downturn in property prices becomes reality, consumers will no longer feel wealthy enough to indulge in excessive retail therapy. Much of the property boom has been fuelled in any case by buyto-let investors who mistakenly believe that property investment is the only decent alternative to share investments.

Even the most optimistic estate agents are now admitting that rents are falling, there is an excess of supply over demand and landlords who cannot fund their borrowings will be in trouble.

Landlords who bought recently with high percentage loans are the most vulnerable and when the September upturn in the letting market does not materialise, they will put their properties on the market, probably all at once. This will precipitate the long predicted setback in the property market.

With no asset class showing anything like a sound reliable return except bonds, cash will be king – as it always is in depression.

Cash is the only asset which appreciates in value because prices fall and you get more for your money.

This is not good news for IFAs. Who needs advice when all you need to know is which bank or building society offers the highest interest rates?

The analysts who are talking about a decade of rec-ession like the 1930s could be right.


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