We have seen such a rollercoaster ride in politics and the stockmarket lately that I thought I would take a look at the more general economic picture this week. The election may have been at the forefront of everyone’s minds but, as far as markets were concerned, the most important events were in Europe.
Greece, a tiny economy representing less than 3 per cent of the eurozone, caused a dramatic sell-off as its imprudent attitude to borrowing and spending came home to roost. A substantial rebound followed as the EU cobbled up a bailout deal. All this has really achieved is some breathing space for southern Mediterranean countries to get their acts together. I am not at all convinced they ever will and I won’t be surprised if problems flare up again.
However, as I highlighted in my last column, this should not put investors off Europe. There are many world-class companies that will prosper, regardless of the debt situation in the peripheral European nations. Indeed, if the crisis leads to a weaker euro it would make many European manufacturers and exporters more competitive, which should have a positive effect on their share prices and a fund such as Jupiter European should benefit.
As far as the UK elections are concerned, I do not believe politics necessarily plays a major role in the stockmarket, other than providing the odd short-term buying opportunity. For investors, the most important impact politicians have is on taxes, which will undoubtedly be rising in this country. Those planning to sell large amounts of shares or second homes should certainly pay attention in the coming weeks, and it has never been more important to make use of tax shelters such as Isas.
I actually feel we are coming full circle, as when I started my career in the early 1980s we had tax rates of 60 per cent and a 15 per cent tax surcharge on dividends. Proper tax planning was absolutely essential. Gradually, during the ’80s and ’90s, much of this eased and investors could concentrate on what was important, ie. whether an investment was good or bad. Unfortunately, we are now back to where we started and attention to tax planning is vital.
One thing the last Government did, much to my surprise, was increase the Isa allowance to £10,200 per year per person. People lucky enough to have that much spare capital should consider using this allowance every year. For some higher-rate taxpayers, the possible alterations to pension tax relief would seem to make them less worthwhile after 2011. However, the changes to capital gains tax plus any future changes in the flexibility of pensions (early access and doing away with the compulsory annuity at 75) could mean the pendulum swings back to favour pensions once more. In any case, I would not be surprised to see the state retirement age rise to 70 at some point, as it would save the Government an enormous amount of money. So careful planning of provision through pensions or investments is necessary for clients to retire earlier.
The debt problems of southern Europe and the possibility of interest rate rises in China continue to linger over the stockmarket. However, I think we are in great danger of ignoring the opportunities. Equities in the UK looked particularly cheap even before the recent falls in the market. To take advantage, I would suggest a look at some good quality UK funds. In particular, Clive Beagles’ J O Hambro equity income, which yields an income of more than 4.5 per cent, Standard Life’s UK equity recovery fund, managed by David Cumming, and Old Mutual’s UK dynamic fund, which is being run by Ashton Bradbury. Many people are still bearish, which I believe is a good sign for future progress in the stockmarket. Unless we see one of those really big events that no one can really forecast, I still think the FTSE 100 could reach 6,000 by the end of this year. So don’t despair, things aren’t necessarily as bad as you might believe from reading the papers.