The papers have been full of the Autumn Statement and what it means for you… you are Mr or Mrs average, aren’t you? A few quid here and maybe a few hundred quid there – that’s what it all comes down to, doesn’t it?
Well, no. Not really. Let’s dispense with the minutiae. Instead, let’s look at George Osborne’s three main themes and what they mean for our investments. Of course, they’re not new themes. But they’re useful themes nonetheless.
Because in reality, you have little choice about how Osborne’s budget affects your household budget. But when it comes to investments, at least you can set yourself up to profit from the situation.
First, let’s look at growth
Osborne was keen to let people know that the economy is growing. And of course, it’s true – in comparison to many of our peers, the UK seems to be performing pretty well.
The Office for Budget Responsibility (OBR) has pencilled in growth of 1.4% for this year, which looks pretty good considering its previous forecast was for a lowly 0.6% growth. But then again it was only nine months ago that the OBR told us we should expect growth of 1.2% – these forecasts go up and down like a yo-yo.
In terms of our investments, it’s really not worth getting too excited about growth anyway. I mean, just look at the post-crisis years. Stagnation, a double dip, possibly even triple dip recession – it didn’t matter. The markets went up whatever the economy did.
In fact, if anything, the biggest risk to the economy was a recovery! I say that because a recovery signals rising interest rates and less money printing. And that has been considered bad news.
Yes, for the man on the street, or a business owner, economic recovery may be useful. But as investors, it’s a red herring. Growth and investment returns are poorly correlated.
During good times and during bad times, what you want is a balanced portfolio.
The escalating debt dilemma
Osborne was also keen to get across the idea that this government is tackling the debt problem. As always, he suggests that the government will balance the books some three years hence.
Of course, this was the same story back in 2010. Yes, by now, the government was due to be in charge of a budget surplus. Fat chance!
Three years might sound like a long time, but it comes around surprisingly quickly. Maybe three years is just about enough time for the punters to forget the promise. It’s certainly enough time for the promise to seem plausible at the time. But these forecasts are rarely met. Government surpluses are as rare as hens’ teeth. You can forget all about that one.
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But, again, this doesn’t really make a lot of difference to our investments anyway. You see, so long as confidence isn’t shaken to the core, the investment markets seem impervious to government debt escalation. And as far as investor confidence goes, this government seems to have scored a surprising victory. There’s even talk that Britain’s debt downgrades could be reversed… go George, go!
You have to remember that the financial markets need government debt. The insurance industry for one has been outraged by the fact that there aren’t enough government bonds in which to invest. The quantitative easing programme has nicked the investments right out from under their feet. Keep building on the debt – that seems to be the mantra from the City.
And as far as business is concerned, the last thing they want to see is some sort of Grecian austerity programme.
The process seems clear: keep talking tough. Maintain confidence. And to hell with the debt build up. Business as usual for the investment markets.
The retirement blindspot
The third big theme to emerge from the Autumn Statement was the old retirement age conundrum. Yes, it seems those currently in their middle-age will be working for longer before the government doles them out a state pension.
But this was always going to be the case. I mean, today, the average wage is something like £28,000, while the state pension is in the region of £7,000.
Not many people are ready to take that sort of a wage cut. Of course, many have saved money in private pensions too. But these savings tend to be pretty paltry. We’re talking, on average, pension savings of about £10,000, or £12,000. That sort of pot won’t buy an annual income of more than about six or 700 quid.
It’s clear that unless the average punter is on a generous defined benefit plan (like many key public sector workers), or they’re prepared to live on a pittance, then they can forget all about Osborne’s idea that they’ll be retiring at 68 or 69 anyway. Most will be working well into their 70s.
It matters for business, because it gives employers a bigger pool of talent from which to choose. And as the reality of working into their 70s percolates into the public collective mind, I suspect it’ll drive a fresh savings culture. There is plenty of retirement investment yet to hit the financial markets. Not bad news at all
And yet again, as far as our investments go… so what?
Summing it all up
There is no doubt in my mind that this recovery is built on very shaky foundations. We’re talking low interest rates, a debt culture, and the knock-on effects it has on things like housing and other assets. But a recovery (of sorts) is what we’ve got. And even if we haven’t, there’s no reason to suspect that more money wouldn’t drift into the financial markets.
Yes, you can think about this budget in terms of pounds and pennies in your pocket. But for me, the themes are kind of irrelevant.
Growth, or no growth, it doesn’t matter. Public sector debt escalation – who cares? For the markets it’s all great news. And as for working longer – yeah bring it on, and anyone that doesn’t want to work forever, start saving now! As far as the markets are concerned, they’re loving it.
I’m sticking to my strategy: selective investments in well-chosen sectors and a balanced portfolio incorporating bonds, cash, equities and commodities.
There’s absolutely no reason to do anything but the right thing. And that is keep calm and carry on.