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List to starboard

In my last IFA View of 2007, I penned a list of wishes for the new year. I am now looking back at the list with feelings ranging from mild shock to some amusement.

My first wish was for a sensible, stable, growing stockmarket with none of the exogenous shocks which were at that time predicted by a minority of pessimists. This is where my feeling of amusement certainly does not apply.

January saw the FTSE 100 fall by around 9 per cent although it was down by 13 per cent at one point. Paradoxically, the press have also been reporting record profitability at UK plcs, with Shell alone making £13.9bn.

The Fed has (over?)reacted to the stockmarket falls and other signs by cutting interest rates by 1.25 per cent while the Bank of England procrastinates. It would be great to see a positive message coming in the form of a decisive cut in UK rates but I remain unconvinced that the powers that be will show sufficient boldness.

In the meantime, IFAs must face their clients with a clear and accurate picture of the position today. There is still a positive message to deliver about the UK economy, with low interest rates, low inflation, high corporate profitability and low unemployment. This is far from the position which the UK was in before the last recession and most clients will remember this if prompted.

One of my other wishes was that the Government would continue its policy of dithering over financial rules such as capital gains tax. At last, a wish that did come true. This wish is quite selfish as change in any form brings with it a requirement for advice. The proposals for entrepreneurs’ relief provide a huge opportunity for confusion and lack of clarity. The legislation will appear some time before April 5 but no doubt there will be insufficient time to ensure that considered financial planning can be effective.

In the meantime, insurance companies look set to be affected by the new CGT proposals as it now seems very unlikely that they will be granted a lifeline. Investment bonds for certain clients now look very inappropriate and new sales will require detailed justification as to why an Oeic portfolio was not recommended. Existing portfolios must be reviewed and advice provided.

This will be a complex area and I am sure the platforms and wraps will be gearing up to supply the necessary technology right now. I am not surprised that life offices’ share prices have come under additional pressure in recent weeks as their business models in some areas are looking unsustainable.

Perhaps I should refrain from writing wish lists for the future and just express some personal concerns.

One area of concern is investment in China. There appear to be some seeds of political unrest appearing in China today. Sights on our TV screens of hundreds of thousands of people queuing to catch non-existent trains back home for the Chinese New Year suggest that some degree of anarchy may not be far away. Clearly, it is to be hoped that this situation can be avoided but we must also hope for some political reform as an economy the size of China cannot continue to develop under communist philosophy.

China is suffering from high levels of inflation, high unemployment, a likelihood of higher interest rates, low domestic consumption and virtually no internal spending on research and development. I hope that a transition can be made so that Asia is not destabilised and the world economy can continue to benefit from the positive aspects of globalisation.

In the meantime, I will keep my money out of this market as I believe returns here will be very unstable in the short term.

Peter Heckingbottom is deputy managing director and investment director at Pearson Jones

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