Weekend press review: Should you still invest in Emerging Markets?

The Financial Times addresses itself to the lessons that can be drawn from the February “flash-crash” (as John Redwood, chief global strategist for Charles Stanley, describes it.) And although we’re stretching the “weekend” time-slot a little here, because his opinion piece was published last Wednesday, there’s enough value here to merit the exception.

Mr Redwood doesn’t deny that the February equity market downturn came as a disappointment after the January “melt-up”, but he suggests that it should have been possible to anticipate its arrival sooner or later. He had been bothered for some time, he says, that his dummy portfolio (for the FT) had been suffering for some time from its 40% bond allocation – the result, he says, of a strict personal rule to move cash out of equities whenever valuations are stretched – but the February correction made him feel very much better about his dummy fund’s holdings in short-dated bonds.

The point here, he says, is that short-dated bonds are unlikely to lose value when the “free-fall days for shares” come along. That will be because their values aren’t so heavily reliant on medium or long-term projections as normally-dated bonds. “One of the main points of having a portfolio, rather than just backing the asset you like best, is to avoid losing too much if the markets go down,” he notes.

But enough of this. What of the future? Redwood is quietly confident that the panicky response to January’s US employment figures is overstated, and that companies around the world are enjoying a “synchronised recovery” which is not about to go away. “I do not think this is yet the top of the cycle,” he says, “or the beginning of a period of fast inflation leading to a squeeze. I expect more positive moves as the news of recovery translates into solid achievements by the corporate sector.”

The Daily Mail has a wake-up call of another kind for the holders of so-called Children’s Bonus Bonds, which were launched in 1991 but which have very largely been allowed to fester at 0.1% interest because their purchasers have forgotten that they ever bought them.

The National Savings Bonus Bonds, which became just plain Children’s Bonds in 2012, were originally floated with a delicious yield that could go as high as 11.84% a year, and they were snapped up by parents and grandparents. (Subsequent issues offered only 2%, however, with no bonuses.) Running for a fixed term of five years, they were designed to roll over into new terms as they matured, or until the child beneficiaries turned 16.

And here’s the catch. Expired bonds (eg at age 16) are quietly turned over to a National Savings residual account, the Mail explains – where they earn a piffling 0.1%. Because they were never very large-scale investments (there was a ceiling of £3,000, with the vast majority of investments being worth much less than that), people have tended to forget them. Including the teenage beneficiaries who may not even know that they exist.

The Mail says that there are currently £640 million of torpid Children’s Bond investments sitting in the near-dormant accounts at present. Something else, then, that clients might want to investigate while they’re rummaging around for the last of their Darwin ten pound notes?

Writing in the Saturday Times Money section, Mark Atherton is looking at investment in the East and Emerging Markets. The article highlights a number of positive factors for the regions, which it cites as attractive valuations, unwinding of QE, a shift away from traditional sectors such as commodities and developing into more diversified economies. Potential headwinds are identified as geopolitical problems, the continuing conflict in the Middle East, China’s growing debt “mountain”, the value of the US dollar, corruption, poor corporate governance and uncertainty about Russia’s intentions on a global scale. On balance, it’s a positive article coming down in favour of investment in these regions.

The Times Money also reports that readers can get a “sneak peek” now of the government’s pensions dashboard  (where pension holders can see all their pension pots in one place).  It isn’t due to start arriving until 2019, although only basic information is likely to be available at first. For now, readers are reminded that they can check their projected State Pension and view the prototype dashboard at www.pensionsdashboardproject.uk

Writing in the Financial Mail on Sunday, Jeff Prestridge accuses the FCA of “pontification” when it comes to the regulation of annuities. The introduction of new rules which come into force this Thursday are, according to Prestridge, about a decade too late. He’s right of course, as the new legislation won’t do anything to help all those people who bought inappropriate annuities and have to live with that decision for life. He goes on to say that, in theory, the new rules are a force for good. When someone approaches retirement they will now receive a document – an annuity comparator – from their pension provider detailing the guaranteed annual income they are likely to get.  Crucially, it will also inform them as to whether higher rates are available from other annuity providers – quantifying how much they could lose every year by sticking rather than twisting.  Prestridge goes on to warn that in practice there are flaws galore. These stem primarily from the fact that the pension providers exercise complete control over how the illustrations are put together. They can be constructed on minimal information – just a person’s date of birth and the value of their pension pot, encouraging people into sticking, or based on more detailed data, prompting shopping around.  Will there be a tightening of the rules in due course. Prestridge isn’t holding his breath on that one. We’ll just have to wait and see.

Markets in the US sneezed – but it was the UK that caught the cold. That’s the headline of the MoS fund focus column this week. In a rather different approach to that taken most weeks, Jeff Prestridge compares two funds and how they have fared over the past month of market jitters – the Old Mutual North American Equity and Franklin Templeton UK Equity Income.

While the Old Mutual fund, managed by Ian Heslop, has seen its assets fall in value by 3.2 per cent over the last month, the Franklin fund managed by Colin Morton has fallen by 5.9 per cent, according to the MoS.

They highlight Morton’s generally optimistic stance, although report on his concerns too:   “At any time it looks as if Theresa May could be replaced as Prime Minister,’ Morton is quoted as saying.  ‘If it happens, it could spark a General Election and then we have the prospect of a Corbyn-led government with its anti-market agenda. ‘There is also Brexit. Four months ago, it looked as if May had a momentum with regards to grappling with this thorn. But now, there seems to be a fallout between the UK and Europe. Given these two key issues, it is no wonder that big international investors are nervous about the UK stock market and are looking elsewhere to put their money.’

Old Mutual’s Heslop has yet to make up his mind as to whether recent volatility in US equity prices is short term or indicative of a longer term sea change. He says in the article that the fund is more defensively set up than it has been since the beginning of last year.

Meanwhile, over at the Sunday Telegraph, it’s the old story of “my property is my pension”. It’s one which advisers will have heard many times at first meetings with clients and who will know that it is fraught with risk for those in pursuit of using it to fund a comfortable retirement.

Telegraph Money reports on a recent survey by the Office for National Statistics, in which nearly half of respondents (49pc) said property would give the best returns, far exceeding those who opted for workplace pensions (22pc) and Isas (6pc).

It says that comparing the latest results – published this month – with previous surveys suggests that the trend is continuing to move in favour of property despite declining rental yields from property. Tax is also a factor, both in the taxation of rental income and also on any capital gain accruing upon sale.

Prior to April 2017, landlords paid tax on their profits after deducting mortgage interest. But between then and 2020, the proportion of mortgage interest that can be offset is being removed. By April 2020 tax will be due on total rental income (minus a 20pc tax credit) – not just profit.

Separately, mortgage rules have become far more onerous. Rents must now cover 145pc of mortgage payments (up from 125pc) assuming a mortgage rate of 5.5pc (up from 5pc). As a consequence, the amount landlords can borrow is falling. Many property investors are more interested in banking the capital gains, but these too are under threat.

Annual house price growth across Britain has fallen from over 7pc in 2014, to around 2.5pc in 2017. Estate agents and lenders are more pessimistic, predicting no price rises at all over the next 12 months. In parts of London prices have been falling for some time, according to several measures.

Claire Trott of Technical Connection is brought in to offer some wise words to readers, highlighting how the advantages of pensions, ISAs and other forms of investment can really stack up for long term investors.

There’s also some analysis carried out for Telegraph Money undertaken by Old Mutual Wealth, which compares £90,000 invested in property, pensions and Isas which make for interesting reading. We’ll spare you the full details here but suffice to say that looking forward using modest rates of escalation, using property to provide for retirement is looking distinctly challenging.

Old Mutual Wealth’s Ian Browne said: “In a surging property market it’s understandable that people would bank on housing. However, it is a fragile basis for a financial plan and is no substitute for diversified saving and investment.” Quite right too (Ed.).

It’s the upcoming tax year-end that is the lead story in The Sunday Times Money section. With the rather attention grabbing headline of “Act now to get £20,000 in free cash”, Ruth Emery goes on to talk about all the usual things you’d expect in such an article – such as paying into a pension, saving in an ISA, using help to buy ISA loophole as well as more unusual things like buying a new bicycle and applying for childcare vouchers. Nothing new for advisers here of course, and it’s the kind of article we will expect to see much more of over the next month as the countdown to the new tax year begins.

Also in the Sunday Times, Ian Cowie also reminds readers that emerging markets have performed best over the past half century, but bursts of short term volatility may still administer a shock. This week, his Personal Account column looks at research from Credit Suisse in their Global Investment Returns Yearbook which he highlights has “masses of useful information for savers and investors”. He does warn about the need to look at exactly what is being measured and when however, but the conclusion is to point out that equity investors received nearly treble the annual return to bondholders and more than six times what savers in cash received over the last 118 years. He also reaffirms his stance as having long been enthusiastic about emerging markets and listing the particular funds in which he retains substantial holdings such as BlackRock Latin America, Fidelity China Special Situations and others.