The funding level journey since 2007 has been long and uncomfortable for all interested parties. The Great Financial Crisis and its aftermath have spawned enough gyrations in stock markets to make a belly dancer dizzy. But at least returns have been positive overall. It’s the bull market in long dated gilts that has pulled funding levels inexorably downwards.
So where do we go from here?
The outlook for return seeking assets remains as fuzzy as ever, with none of the main indicators (economy, valuation, sentiment) providing clear signals for the future. Despite the overall gloom though, we do have reasons to be optimistic e.g. moderate growth, stronger banks, American jobs, cheap oil, austerity fatigue; but “events dear boy” – they just keep pegging us back!
Our View: the message for assets remains the same – diversification, quality and income are your friends.
But has the bell tolled for falling rates? This might seem a strange thing to say given “lower for longer” is heard more often than “a swan can break your arm”; and given 10 year gilt yields have fallen from 1.5% pa to 0.8% pa after Brexit. But it’s just because of that fall that we raise the question.
Paul Krugman, the eminent American economist, wrote a piece recently suggesting that the current level of rates does not reflect a risk off situation. Instead, it’s because investors are throwing in the towel and accepting secular stagnation (low growth) as the new normal. He calls it The Great Capitulation (www.gc.cuny.edu/CUNY_GC/media/LISCenter/pkrugman/The-Great-Capitulation.pdf).
Our View: we hope he’s right and that there could be scope for positive surprises from here.
In Cutting Rates Would be MadHouse Economics for the Bank of England (29 July), Neil Collins of the FT picks up the baton, arguing that loose monetary policy has run its course and that further loosening would be futile.
Our View: while a Base Rate cut is likely, we too suspect that Central Banks are pushing on strings – and that even lower rates from here are as likely to make people spend less as they are likely to make them spend more.
So, are we there yet? Our View: No, not yet – but nearly!
And finally…..
Over the weekend, former Pensions Minister Ros Altmann suggested that the fixed leg of triple lock protection for State Pensions should be scrapped. Our colleague Stuart Price explains here (www.walesonline.co.uk/business/business-news/what-triple-lock-lock-state-11685924).
Our View: the Good Doctor Altmann has a point!
We hope you find the above as interesting as we did. Please feel free to let us know at QuIP@quantumadvisory.co.uk.
The QuIP Team
1 August 2016