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Since
our report in March 2003 the stockmarket has finally put in
a good six months performance. This has been spectacular in
some areas - over 50% growth in Latin America and over 40%
in both the UK Technology & Telecoms sector and the Smaller
Company sector. The flip side of all this is that the fixed
interest sectors put in poor returns. The UK Gilts returned
-2.4% over the last six months.
The
Outlook for the immediate future can, as always,
be stated optimistically or pessimistically: |
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The war in Iraq was quickly won but the casualties continue
to rise and peace in the Middle East seems little
closer. The oil price remains high. |
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There are growing US trade and budget deficits which
could either drag Europe and Japan out of recession
or derail the engine of world growth. |
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The US 2004 presidential election is traditionally positive
but it could lead to more uncertainty if the recent
electoral outcome of the Californian Governor Arnold
Schwarzenegger is anything to go by! |
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The next interest rate move is quite likely to be in
an upward direction. A negative influence on fixed interest
stock values but a positive influence on annuity rates.
As ever a debatable influence on equity values. |
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After
the recent bounce the markets are bound to look less attractive.
However the all important factor of investor sentiment does
seem to be changing - the bears are becoming quieter and there
are fewer of them. |
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We
are again beginning to hear talk of takeovers for large companies
such as Amersham and stake building in stocks such as Manchester
United. The FTSE 100 at 4274 has held above 4000 for the last
three months, the dark days of the 3700s seem to have been
left behind. Although the pension fund crisis continues for
future pensioners, the funds themselves seem to have largely
finished their switching out of equities into fixed interest. |
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We
may never return to equity fever which caused stocks to roar
ahead of themselves, but at least the market now feels as
if it could slowly resume its long term upward course, albeit
on a shallower gradient. |
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Endowment
policies receive much adverse comment. The estimated
future growth of these policies (many of which are used to
pay off mortgages) are continually being downgraded. The latest
round of cuts on growth projection are in the order of 1.75%
(bringing annual projected returns down to 4.25% or even as
low as 3.75%). The traditionally heavy exposure to equities
has hurt these funds badly over the last few years; so many
funds have switched out of equities into fixed interest stock
and cash. This means that any growth potential is now limited
hence the cuts referred to above. |
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Eagle Star, as one example, has just cut its future average
forecast return to 3.75% and announced that two thirds of
the fund is now in cash and bonds - up from only one fifth
three years ago. Having suffered in the bear market these
funds will not now recover swiftly if we enter another bull
market, the losses have effectively been locked in. Some researchers
now estimate that 90% of endowment policies will not pay off
the mortgage they were taken out to cover and that more than
half of all policies will have a shortfall of more than 50%! |
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This
will be a very worrying position for many people who mortgaged
their properties in the late eighties and early nineties when
stockmarkets were high, endowments popular and property prices
were also high. Insurers now send out regular valuations of
individual policies and forecasts on whether they are still
on track to pay off the mortgage. Please do take the time
to review your own position and ensure that if necessary you
have fully considered how to make up any shortfall. |
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Remember
it is not all bad news. Over the period of falling equity
markets we have seen lower interest payments on loans. The
opportunity has been (and still is) there for borrowers to
channel the savings on the lower rates into reducing the debt
(either directly or by other savings schemes). |
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Like
Endowment policies, many Personal Pension Funds
are on course to provide retirement income at significantly
below previous expectations. As a guide, £10,000 of
pension fund at age 65 will generate an income of approximately
£725 per annum for a man and £650 for a woman
(both figures are before tax). You will receive less if you
want to (a) retire earlier, (b) have an increasing income
(eventually you would exceed these levels), (c) provide for
a spouse after your death. |
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Please
do review your own finances and consider whether action is
required to take account of potential Endowment and Pension
shortfalls. Without wanting to wield the big stick, if the
answer you find is that you need to adjust your current spending
patterns, then the sooner you start the better! |
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Risk
is a very personal matter - one that you need to address personally
and keep under review. If the equity growth really is going
to be shallower (referred to above), justifying the risk of
equity investment becomes harder. |
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It
is our view that widespread Stockmarket investments (for example
the general managed funds) do offer potential returns large
enough to justify their underlying risk for the average investor.
But are you an average investor and do you accept that the
values can fall? You have the final say. It doesn't give you
a simple answer, but visit Risk
on the News & Comment page to see the factors that affect
your review. If you don't have access to the Internet, please
ask us for a copy. |
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If
you would like our assistance on any of the points raised
then please do phone us.
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