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Currency conundrum

As Easter rushed towards me last week, there was little sign of the market pausing for breath. Private client stockbrokers of my acquaintance have been busy balanc-ing their clients’ capital gains positions. This time last year, there were no gains to offset to speak of. Now we are in a new tax year – a year where change seems inevitable as the country determines who should be in charge at the centre.

For the financial advice industry, the opportunities look remarkable. With increased National Insurance payments, a new higher tax rate coming in, changes to pension contribution rules and higher Isa allowances, any adviser worth his or her salt should be trawling through the detail for their wealthier clients and recommending creative tax saving strategies. Some of these might even require investment suggestions. But where to invest, that is the question.

I am torn by the very international nature of our domestic market, with its accessibility and transparency, and the very clear appetite for investors to place their savings abroad.

Did I really read in Mark Dampier’s column recently that some pension trustees he knew, despite requiring a reasonable income, believed the bulk of their fund’s portfolio should be committed to emerging markets? I treat behaviour like that as a warning signal.

However, the risk exists that the pound will succumb to increased selling pressure if uncertainty over the outcome of the election persists.
Moreover, some other currencies look set to make ground against the rest and could provide some useful gains for sterling investors. The dollar, for example, appears to have reversed its downward momentum and, if the recovery there is sustained, it could gain more friends.

It is China, though, where further appreciation looks as certain as anything can be in the capricious world of foreign exchange. At least, that is the view of HSBC, which recently published a weighty report on the outlook for currencies.

They are not expecting anything other than a gradual appreciation but as it might place some limit on inflation there, it is currently a concern for the authorities.

It is, though, our own general election that receives the most attention in this report. It makes the point, quite correctly, that the pre-election polls should not be taken with anything other than a massive dose of salt. Expectations have been growing for the outcome to be a hung Parliament, reinforced by a dwindling Conservative lead in the polls, yet Britain’s gamblers are still betting on a Conservative overall majority, albeit slender.

As odds owe more to the weight of money placed on a particular outcome than the knowledge or understanding of the underlying situation exhibited by the punters, I am not sure I take any comfort from this. On the day that I attended the Cheltenham Festival, the favourite only won once in six races.

Still, it is hard to see what might take the pressure off sterling in the short term, so perhaps buying investments denominated in other currencies is no more than prudent at such a time.

I await the profit-taking that must inevitably follow a recovery of the magnitude we have seen and welcome the return to favour of the value management brigade.

Wise investors will proceed cautiously in these uncertain times but with inflationary pressures still mounting, equities and property continue to hold out promise, so a setback could present a buying opportunity rather than presage a collapse.<

Brian Tora (brian.tora@ centaur.co.uk) is principal of the Tora Partnership

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