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Investment view

It was inevitable that Ned Cazalet would come up with something controversial when he spoke at our riverside party for IFAs last week. Ned was entertaining and his tone was just right for a light-hearted evening with a hint of seriousness.

The intention was to entertain but to deliver a thought-provoking message for the independent advice community at the same time. The theme should not be so much about investment but more about the issues that we all face and where guidance is appreciated, is what matters. I would like to think that we have succeeded in delivering to expectations on both occasions.

Ned&#39s theme was built around the way in which low inflation was not doing the life insurance industry any favours. Some of the points he made were uncanningly similar to those I have been proposing at seminars for some while. Low inflation may be the pot of gold at the end of the rainbow sought so diligently by governments but it brings with it just as many problems as high inflation, even if they are different.

In the crazy years that characterised the tail end of the last bull market, we justified paying silly prices for shares on the argument that low inflation and low interest rates meant people would pay more for equities. The reality is that inflation flatters profits and asset values so, if anything, low inflation and low returns on cash and bonds suggest that you will receive lower returns on equities as well. And, just as important, is the fact that inflation erodes debt, so low inflation means your borrowing is not diminishing.

This is where Ned had an interesting point to make. If investment returns were likely to be low for the foreseeable future, then it seemed inconceivable that the returns on endowment policies would improve. Apparently, there are 10 million endowment policies out there, supporting mortgages in many instances. As these mortgages come to term and the endowment policies mature, it is looking increasingly likely that there will not be sufficient money in the pot to pay the lender. For a society that is becoming increasingly indebted, this is not a pretty prospect.

Of course, for some this will be no more than an inconvenience but for others, perhaps approaching retirement on a low income, the prospect will appear frightening. Such a scenario brings the fortunes of banks and insurance companies together in a charming way. While any denouement may be some years away (and would be avoided if either strong stockmarket returns are achieved or a dose of inflation changes the value of the debt mountain) it is clearly something to bear in mind for the future.

Meanwhile, the market, which has maintained its sunnier feel, may now pause for breath. We will be bereft of meaningful news until we hit that most difficult of months, October, so investors will probably do best sitting on their hands. Perhaps a more useful task for these lengthening nights could be to examine the syllabus for the proposed new O and A level in financial planning. The prospect of a batch of eager 18-year-olds being released into the financial advisory market in a few years time is positively alarming. But at least a message is getting through that financial education should be more of a priority than has been the case until now.

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